When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
The bull case for Appen
The Appen Ltd (ASX: APX) share price has sunk nearly 80% from its highs in 2020 to now rest at $9.81. Multiple guidance downgrades, bearish analysts reports and shifting customer priorities have presented major challenges for the business. Despite the share price fall, the selling could be potentially overdone. Here, I’ll be presenting the bull case; and it might not all be bad for Appen.
APX share price
Reframing the story
The author of Sapiens: A Brief History of Humankind, Yuval Noah Harari, noted the world as we know it is essentially just a collection of stories:
“Humans think in stories, and we try to make sense of the world by telling stories”
Appen’s story was a fast-growing business mission-critical to powering the world’s biggest companies’ artificial intelligence (AI) projects.
This was supported by the rapid rise in revenue, from $82 million in 2015 to $599 million in 2020.
Subsequently, the Appen share price rocketed (as shown above) as everyone wanted a slice of the action.
But when big tech reallocated budgets elsewhere, sales fell, guidance was cut and the market panicked.
Reframing the Appen story another way: Appen is reliant on a small number of global tech giants wanting to outsource largely one-off labour-intensive tasks.
Both stories are correct. But the framing is different.
Mr Market is a fickle beast. Appen’s narrative changed, and the market reacted accordingly.
Not nearly as bad you think
The reallocation of big tech budgets is not nearly as bad as suggested in the share price.
Global services dipped just 9.2% in the most recent half.
Sure, Appen is at the mercy of the tech giants and their AI budgets.
But this has always been a risk and one that should be baked-in to any valuation of the business.
Positively, the data annotation (Appen’s bread and butter) industry is expected to grow at 25% per annum over the next five years.
AI is not just reserved for big tech, with many companies from e-commerce through to logistics searching for AI data.
Derisking through diversification
To counter the concentration of its revenue and customer base, Appen has recently taken steps to diversify its revenue base.
New markets such as China have become a bigger focus, in addition to Enterprise and Government applications.
Additionally, the business has recently expanded in location analytics through the acquisition of Quadrant.
Albeit off a smaller base, new markets revenue increased 31.5% to $47.8 million in the last half.
My take
No doubt the Appen share price got ahead of itself in 2020. But it’s unfair to blame management entirely.
The market got hot, everyone jumped on and then the story changed.
Admittedly, management could have done a better job diversifying earlier. It also should have forewarned the earnings drop-off earlier and more clearly.
But for a business trading on an EBITDA multiple of just 15, Appen presents compelling value if management can execute.
Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169
