Is This Artificial Intelligence (AI) Stock About to Break Out?

Appian (NASDAQ: APPN) has had a roller-coaster ride as a publicly traded company. After soaring in the early stages of the pandemic on high hopes for its low-code technology, the stock fell sharply in 2021. It has stayed down since then as software stocks have been generally under pressure following a "tech recession" in 2022, and slow growth since then.

During that time, Appian has evolved into an artificial intelligence (AI)-based process automation company, which is sometimes called low-code or process mining. It's streamlined its business through layoffs and cost cuts, reformulated its strategy to focus on the high end of the market, and now looks as strong as it has in years as it's delivering strong growth in cloud-based software and is turning profitable.

The stock moved up 2.6% on Thursday as the market responded to solid results in its third-quarter earnings report. Cloud subscription revenue, the metric the company focuses on, rose 22% to $94.1 million. Overall revenue was up just 12% to $154.1 million, which was due to a decline in professional services revenue, in line with Appian's strategy of pushing more of that revenue toward partners like consultants that help sell the product. Total revenue was ahead of estimates at $151.9 million.

On the bottom line, Appian also showed significant improvement as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from a loss of $5.3 million to a profit of $10.8 million, benefiting from cost cuts, focusing on the higher end of the market. The company reported adjusted earnings per share of $0.15, up from an adjusted loss of $0.20 per share and well ahead of a per-share loss of $0.08.

Appian also raised its full-year EBITDA guidance of $5 million to $7 million, a significant improvement of its guidance from the beginning of the year for a loss of $20 million to $25 million.

Image source: Getty Images.

How Appian is harnessing AI

Artificial intelligence has rapidly become the future of technology and for software companies like Appian, and AI is embedded in the company's process automation platform.

Companies like Amazon are talking up the power of "agentic AI," a tool that operates autonomously, making complex decisions based on real-time data. Appian CEO Matt Calkins asserted that the company's process automation is a better solution, saying on the earnings call, "Appian uses AI in a process to create a superior version of Agentic AI."

Appian is a small company, though it competes with much larger software companies, and its focus on one category and on just the enterprise market is a strength. After all, its gross renewal rate is regularly 99%, and was again in the third quarter, showing that customers are overwhelmingly happy with the product.

AI adoption appears to be at a tipping point in the software industry as companies are now aware of new capabilities and are looking for ways to harness their power. Appian has an opportunity to capitalize on that opportunity. In an interview with The Motley Fool, Calkins explained how the market is shifting to Appian's favor.

"We're now more mature as an economy about what we want out of AI, and it's becoming an efficiency proposition," he said, arguing Appian was well positioned to deliver value. He added, "So I believe that [in] this phase of the AI national conversation, the international business conversation is going to be better for us."

The AI opportunity

Appian's cloud growth accelerated from the second quarter to the third quarter, and the company is in a good position to make continued gains into Q4 and 2025, especially with the margin improvement. Management called for adjusted EBITDA of $6 million to $8 million for the fourth quarter, and revenue growth of 14% to 17% to a range of $95 million to $97 million, though its top-line guidance is typically conservative.

Appian hasn't given guidance for 2025, but Calkins said he's looking forward to the new year. Based on the momentum in the quarter and the broader emergence of AI in the software sector, Appian could be in store for a breakout year in 2025.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Appian. The Motley Fool has a disclosure policy.