Motley Fool: Software for the win

Appian’s (Nasdaq: APPN) share price was recently down about 74% from its 52-week high, presenting an attractive entry point for risk-tolerant investors.

Appian specializes in “low-code” software that helps businesses build apps and workflows for themselves without having to hire in-house developers. (Its customers recently included Cigna, Major League Baseball, Merck & Co., T-Mobile US and the United States Air Force.)

In Appian’s third quarter, total revenue increased 20% year over year to $92.4 million, driven by a 32% increase in the subscription revenue segment, to $67.2 million. The bottom line was in the red, though, as Appian continues to spend heavily to support expansion. But with over $188 million in cash and short-term investments on the balance sheet, the company can afford this strategy.

Appian’s subscriptions are growing in terms of the number of customers and how much they’re willing to spend. Its recently announced 116% net revenue retention rate for cloud subscribers means the average organization that’s been with Appian for a year is spending 16% more than it was a year ago.

Appian stock is not for the risk-averse, as the company is not yet profitable. But with a recent market valuation of around $4 billion, the company has a lot of room for growth. (The Motley Fool owns shares of and has recommended Appian.)

Ask the Fool

Q: When a company buys back some of its own shares, what happens to the stock value? – N.M., Frankfort, Kentucky

A: It depends. Shareholders can benefit when companies repurchase shares – if those shares are undervalued. Many companies repurchase their shares when they’re overvalued, though, which wastes money.

Imagine Scruffy’s Chicken Shack (ticker: BUKBUK) is worth $100 and has 100 shares outstanding – each share tied to a dollar of value. If Scruffy’s buys back (essentially retires) 25 shares, 75 will remain, and each will have a greater proportional claim on the company’s future earnings.

Since earnings per share are one of the metrics used to judge “value,” fewer shares usually mean the value rises.

Q: When we buy shares of stock in a company, where does our money actually go? – L.R., Nampa, Idaho

A: You might assume that your dollars go to the company, but you’d be wrong. A company collects money for its publicly traded shares when it first issues them to investors via an initial public offering (IPO). After the IPO, the shares will trade on an exchange, bought and sold by investors through intermediaries who get a cut of each transaction. Companies do sometimes issue “secondary” offerings of stock, collecting money when those new shares are released onto the market. But after that, the shares are again simply traded between investors.

It’s much like collectible comics. If you buy a comic book when it’s published, the publisher gets your money. But after that, the comic book might be traded between collectors, with its value going up or down depending on what they think it’s worth, based on supply and demand. The publisher, like the stock-issuing company, gets no more money from the comic.

My dumbest investment

My dumbest investment? Cannabis stocks – they just did me dirty. I’ve still held on, though, because it’s not a loss until you sell. – O.P., online

The Fool responds: Successful investing involves buying into great businesses at the right time – when they’re undervalued – and then hanging on.

Many investors are reasonably assuming that cannabis stocks are promising, as the legalization of marijuana is becoming more widespread in the United States and may even happen nationwide. But profiting off of the burgeoning industry isn’t necessarily that easy.

The cannabis industry is still developing, and it’s not yet clear which cannabis companies will end up dominant over the long run. If you want to invest in cannabis but aren’t sure which companies will perform best, consider shares of an exchange-traded fund (ETF) that focuses on it. (ETFs are funds that trade like stocks; you can buy into them through a brokerage account.)

There are many cannabis-focused ETFs, such as the AdvisorShares Pure US Cannabis ETF (MSOS), which recently spread its assets across several dozen companies, all based in the U.S. The fund has been around since September 2020 and has an expense ratio (annual fee) of 0.73%.

You’re right that you’ve suffered no loss if you haven’t sold yet. If you’re bullish on the future of cannabis, reassess your stocks and perhaps hang on. If another sector seems more promising, move your money.