AppFolio Is A High-Growth Property Management SaaS Stock

We've covered a wide range of end-use cases for software-as-a-service (SaaS) between our Buy List and Watch List.

There's SaaS for creative design (Adobe (ADBE)), construction and civil engineering (Autodesk (ADSK)), service desk operations (ServiceNow (NOW)), business productivity (Microsoft (MSFT))... and many more!

Today, I want to introduce you to a SaaS provider that serves a new use case: rental property portfolio owners. The company is AppFolio (APPF), and I think it makes a great addition to our Watch List. Let's take a look!

What AppFolio Does

AppFolio provides SaaS tools for companies that own and manage rental real estate properties. Historically, the firm has catered to small-to-medium-sized business owners (SMBs). However, with the recent launch of Property Manager Max, it is targeting larger operators.

There are two revenue categories. The first, "core solutions," charges a monthly fee per managed unit. This offering enables managers to list properties, screen applications, automate billing and payments, manage maintenance requests, budget and forecast, and build dashboards to track portfolio performance. Core solutions accounted for 24% of sales in 2024.

The second category, "value-added services," generates revenue through transaction-based fees. Examples include a percentage cut from payment processing, background and credit check fees, referral fees from maintenance contractors, debt collection services, and other related transactions. Value-added services account for 76% of revenue.

Growth and Revenue Recurrence

AppFolio follows a typical SaaS model. The core solutions segment is a straightforward monthly subscription that scales with units under management. Meanwhile, the value-added services function as a toll-booth model but remain highly predictable, as these fees arise from routine business transactions. Although revenue may fluctuate with rental activity, AppFolio's revenue is nearly 100% recurring and reliable.

Growth has been strong. The firm's three-year CAGR exceeds 30%, with 2024 sales growth at 28%. The property management software market is large and expanding—currently estimated at $27 billion and projected to grow nearly 10% annually to reach $50 billion by the early 2030s. With under $800 million in revenue, AppFolio holds less than 3% of the current market.

The company has two primary strategies to sustain rapid growth. The first is expanding into the large property management segment. AppFolio launched Property Manager Max about a year ago to attract these clients, which could enhance customer retention and organic growth.

The second strategy focuses on AI capabilities to differentiate the platform. Tasks like leasing, accounting, and maintenance scheduling are ideal for AI-driven automation. If AppFolio can establish a lead in AI, it could capture additional market share.

Overall, I believe it is reasonable to expect at least mid-teens growth rates over the next five years.

Moat

Like many B2B SaaS platforms, AppFolio benefits from high switching costs. It serves as a core business management system for property owners, handling marketing, leasing, maintenance, and financials. Switching providers would require extensive data migration, workflow reintegration, and staff retraining.

Additionally, AppFolio has one of the most respected brands in the industry, making it a default choice for prospective customers. With a 16% market share, it trails only RealPage (RP) and its Buildium product, which together hold about 23% market share.

While the switching costs are significant, I would still classify AppFolio's moat as "narrow." Most of its customers are SMBs, which have less stability and face fewer bureaucratic hurdles when switching platforms. However, as AppFolio expands into larger property managers, its switching cost advantage could strengthen.

Management and Financials

Shane Trigg became President and CEO in March 2023 after leading AppFolio's core Property Manager product and serving as President of Real Estate. Before AppFolio, he spent 25 years in SaaS, including roles at Salesforce.com and as Vice President of Intuit's Real Estate Solutions division.

Under Trigg’s leadership, AppFolio has improved its financial performance. The company has consistently delivered strong revenue growth and maintains a debt-free balance sheet. More notably, free cash flow margins expanded to 23% in 2024—far exceeding the mid-single-digit margins seen under his predecessor and aligning more closely with a typical SaaS business.

At 45 years old, Trigg could lead AppFolio for a decade or more if he chooses to stay.

His personal stake is small at 0.5%, but insider ownership is high at over 30%. Maurice Duca, head of the venture capital firm that initially backed AppFolio, holds a 19% stake. Co-founder Klaus Schauser owns another 9%. Neither is actively involved in the company today.

Risks

I consider AppFolio a "medium-low" risk investment.

Industry-standard risks apply. Data security is critical, and any major breach could damage the brand's reputation.

Regulatory scrutiny around rental real estate is another factor. The industry is politically charged, and while AppFolio has avoided controversy, competitor RealPage has faced DOJ scrutiny over its pricing tools. Compliance and litigation risks remain.

Conclusion

AppFolio is an excellent company with a sustainable, scalable business model that checks all of our key boxes. It earns a "green dot" rating, and I'll be adding it to the Watch List today.

Now, the final question: What is the stock worth? Historically, AppFolio has not generated cash at a high rate, but this is changing. Given its SaaS model, I see no reason why it cannot sustain a typical "low 20s" free cash flow margin—I’ve modeled 22%. Using a conservative 16% revenue growth rate, minimal dilution (based on historical trends), and our standard 10.5% discount rate, I estimate a fair value price of $211. That’s roughly where the stock trades today, making it a fair buy—but not a great one. We will wait for our usual 25% margin of safety before initiating a position.