AppFolio

The Future of Property Management Software

Investment Thesis

Durable Growth Model with Accelerating Profitability

Since its IPO, the company has successfully transitioned to a high-growth fintech model, with 76% of revenue now derived from high-margin financial services. This strategic shift, combined with a 10x increase in ARR to $790M by 2024, has driven substantial operating leverage. This strong operational performance, coupled with the ability to raise prices, warrants a premium FCF/share exit multiple.

Recession Resistant TAM in a Low Churn Vertical

The property management software market exhibits strong defensive characteristics, serving a recession-resistant end market. Renter-occupied units in the United States have consistently increased by approximately 1.0% annually since 1940. This market demonstrates high customer stickiness, evidenced by AppFolio's industry-leading churn rate of under 3%. This low churn enables significant reinvestment into product development and up-market expansion into higher-value segments, where customers are more receptive to adopting value-added services.

Sidecar Investment Opportunity with IGSB Directors

IGSB, as a long-term investor, prioritizes maximizing FCF/Share over short-term growth for the purpose of exiting an investment. This focus is evident in AppFolio's minimal share dilution, with only a 1% increase in outstanding shares between 2019 and 2024, contrasting sharply with the frequent and significant dilution observed among typical SaaS companies. This long-term perspective is further reinforced by the substantial personal investment of Tim Bliss and Reece Duca, senior partners at IGSB, who collectively retain approximately 25% of AppFolio's shares, representing ~40 of the Class B voting power.

Déjà vu Arising from Sell-Side Misunderstanding of Fintech

AppFolio's implementation of new ACH fees in July 2023 has accelerated value-added ARPU growth. However, sell-side analysts anticipate a normalization of this growth and are forecasting the company's growth based on combined gross margins of 67% and operating margins of 23-25%. We believe that the sell-side significantly underestimates the potential for margin expansion driven by the company's payments business. We project that AppFolio can achieve steady-state operating margins exceeding 35%. Historically, sell-side analysts have demonstrated a tendency to misinterpret AppFolio's results, previously issuing EPS and FCF forecasts based on breakeven operating margins.