AppFolio's Valuation 'Does Not Appropriately Reflect Risks Ahead,' Morgan Stanley Says In Downgrade

Despite being convinced of the fundamental strength of AppFolio Inc (NASDAQ: APPF), one analyst at Morgan Stanley turned bearish Monday after a strong run-up in the stock's valuation. 

The Analyst

Analyst Brian Essex downgraded AppFolio from Equal-weight to Underweight with a price target of $52.

The Thesis

With AppFolio shares more than doubling over the past year, it's time to "take a break" on the shares, Essex said in a Monday note. Although the premium valuation of the SaaS company's shares are justified, better risk-adjusted upside can be found in other names in Essex's coverage universe, the analyst said in a note. 

AppFolio is a fundamentally solid, well-run growth company, Essex said. The company has consistently generated over 30-percent growth and EBITDA margins of more than 20 percent, outperforming the emerging high-growth SaaS vendors Morgan Stanley covers, he said. 

"However, the stock is now one of the most expensive among [the] 'Rule of 40' vertical SaaS growth peers we cover and we think the current valuation level does not appropriately reflect risks ahead." 

Those risks include competition and incremental investments, Essex said: the further the company moves ahead in the upmarket, the greater the competition. 

AppFolio's recent desire to branch out of its core property management space and add more verticals to its "portfolio of apps," as well as legal efforts ahead, will pressure margins given the incremental investment in R&D and sales force required to achieve the objective, Essex said. 

The Price Action

Shares of AppFolio have surged about 40 percent year-to-date. The stock was down more than 5 percent midday Monday in the wake of the Morgan Stanley downgrade. 

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