There are few ASX shares that have seen such a fall from grace as Appen shares since 2020. In those days, Appen was such a good stock, it was part of a quintet of stocks deemed the WAAAX stocks and claimed to have outperformed the American FAANG stocks. While some other stocks in that cohort have continued onwards and upwards, it has not been so with Appen. And it copped yet another blow this week.
Recap of Appen
Appen sources and sells machine learning data to train AI algorithms. Historically, its client base was concentrated around a handful of big tech companies and predominantly for advertising purposes. Appen has been diversifying its customer base into new clients and markets although investors fear these cash flows won’t be as reliable and as strong as before. This has been showing in its results and in repeated failure to meet its own guidance, let alone consensus estimates.
In FY22, which is the calendar year, its revenue fell by 25% and its bottom line swung from a $28m profit to a $239m loss. In FY23, the stock surpassed $3 on a couple of occasions over hype that it can capitalise on the rise of ChatGPT and hope that things can be better because of new management and a cost reduction program.
But it is not being shown in the bottom line. In 1HY23, the company’s revenue declined 24% to US$138.9m, a fall management blamed on challenging external operating and macroeconomic conditions. It posted an underlying loss of US$34.2m and a statutory loss of US$43.3m. What made things worse is that after previously promising that the second half would be better, the company expects the second half to be roughly the same. It also promised it would reach ‘underlying cash EBITDA profitability on an annualised, run-rate basis‘.
Earlier this week, Appen released its preliminary results that were accompanied with further bad news
Appen shares plunged again after bad news
Shares crashed at the market open. They closed Monday at 27.5c per share, well down from $40 per share.
Just before we get to the results, let’s get to the bad news first. Last weekend, Google told Appen it would be terminating its contract with Appen, effective in mid-March. In FY23, Appen received $82.8m from Google at a gross margin of 26%.
In CY/FY23, Appen claims to have recorded (based on unaudited management accounts):
- $273m in revenue (down from $388.5m the year before)
- An underlying EBITDA (excluding forex) of $20.4m for the full year (up from an $11m loss the year before)
- $32.1m cash on hand (to be fair, up from $23.4m the year before, although it raised $90m across CY23 in May and November).
It did not show a forecast bottom line, although this was a $239.1m loss in FY22, due to a $204.3m impairment.
The company told investors it would adjust its strategic priorities and provide further details in a month’s time when it released its audited accounts in late February. It tried to spin the results by saying there was an ‘EBITDA profit’ in November and December, thereby depicting its US$60m cost-cutting program was working.
Shares crashed because when things are glum there’s worse to come
The Google news was bad enough, but investors fear there’s worse to come. The revealing of just how much revenue it was generating from Google showed the pivot away from Big Tech was going way too slow at best, or not happening at all at worst. We wouldn’t be surprised to see other big contracts cancelled because big tech companies are gradually developing their own tools.
Appen’s plan has been to use its data sets to companies looking to train their own AI bots. However, this space is highly competitive, led by US-based Lionbridge that has a similar data-scrubbing service. And on top of all this, the company could easily have been acquired last year, but the suitor walked away.
The bottom line here is that this is a company with an existential crisis that appears no closer to solving it than it was a year or two ago. The only reason you’d buy it is if you were desperate to reduce a Capital Gains Tax bill.
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