Date of inclusion: 4 August 2021
Share price on inclusion in Marc & Stuart’s Top Picks: $12.29
52-week range: A$10.65 – A$43.66
Risk Level: High
Servicing the world’s largest Tech companies
Appen helps the world’s largest technology companies, including Microsoft, Google, IBM and Facebook, build and train their Artificial Intelligence systems. Appen’s platform collects and labels images, text, speech, audio, video and sensor data to tag and label them for use in AI systems. Appen’s business was temporarily impacted by Covid-19 and this has hit sentiment hard since mid-2020. However, we see potential for the stock to turn around later in 2021 given the strong competitive advantage the company has built over the years and the rapid evolution of the AI field.
A disappointing 2020
Appen had a disappointing 2020, particularly the second half of the year. EBITDA growth came in well below expectations with EBITDA only reaching $108.6m. Customers experienced Covid-related dips in advertising and there were regulatory issues around privacy for Google and Facebook in the US and Europe. As a result, the share price declined significantly. However, the order book for 2021 is looking good, although back end loaded, i.e. momentum should be improving from the middle of 2021.
Why we like Appen
Appen is currently trading on an EV/EBITDA multiple of only 12.5x for FY21 (ending in December) and 10.4x for FY22 in spite of the expected 20.5% EBITDA growth in FY22 and 16.4% in FY23. We believe this is an attractive valuation for a fairly unique AI-focussed company. The share price has bounced back from the important support level around $11 twice now and we believe the stock is ready for a new upward swing.
The AfterPay effect
Apart from Appen’s own merits as a company and an investment, we believe the intended acquisition of AfterPay by Square, announced on 2 August 2021, has put the Australian mid-to-large cap Tech players on the radar screen globally. Although much smaller than AfterPay and not consumer-facing, we believe Appen is quite unique in its own right and potentially very valuable to the right player. While we are not suggesting that Appen will be acquired in the near term, we’re not ruling it out either. It does add an interesting angle to owning Appen shares.
Update 24 February 2022
Reason for update: FY21 results announcement
Appen misses its own EBITDA guidance
In August 2021, APX guided to an FY21 EBITDA result between $81m and $88m. Yesterday, the company reported an underlying EBITDA of $78.9m, or about $2m below the lower end of its own guidance range. While $2m is not the end of the world, it is still a miss and it coincided with the market turning sour following more bad news out of Ukraine. The share price fell 25% in morning trading.
The top line was actually growing in 2HY21, with a 32% sequential increase versus 1HY21 in Global Services revenues. But it was only up 5% for the full year compared to FY20. The revenue share from non-advertising related projects keeps growing (now 76%), which we believe is a very good thing given that Apple’s changes to tracking capabilities in iOS keeps impacting ad revenues for the likes of Facebook, a big APX client.
New Markets now accounts for 23% of total revenue, up from 20% in FY20. China in particular was a main contributor to the 21% revenue growth for New Markets in FY21.
We believe the ongoing lowering of dependency on ad-related business is a good thing. In the very near term, though, the market is not liking the earnings miss and the fact that the company didn’t pre-announce this ahead of the actual earnings release.
Appen wants to double its revenue by FY26
Looking out longer term, Appen wants to double its FY21 revenues of $447m by FY26, so in five years’ time. That equates to about 15% revenue growth per year, which doesn’t sound like much for a Tech company. However, when we look at consensus estimates through FY26, the market has been assuming an average 10% growth per year throughout that period, to $718m in FY26. So, the growth target APX has set itself is much more ambitious than market expectations.
We will keep APX on our Top Picks list for the moment. We believe the stock has been punished too harshly in an investment environment, which is shaken by the Russian Invasion of Ukraine.