Appen

Date of inclusion: 17 March 2021
Share price on inclusion: $18.11

Date of exclusion: 6 May 2021
Share price on exclusion: $11.63

 

Reason for exclusion: CEO is flagging increasing competition

Surprising that management would mention this at a conference
On Thursday morning, 6 May at the Macquarie Australia Conference, CEO Mark Brayan flagged that Appen is experiencing increasing competition from smaller competitors that are increasingly well-funded. He called it “maturing competitors” and said it was “unsurprising”. We find it very surprising, however, that the company mentions this at a conference and not in a formal press release, or at the time of its earnings release or at the start of an analyst day.

This statement is a big deal! More competitors means APX needs to work harder to stay ahead, as the company puts it, but it also means it will have less pricing power going forward. It also means that the company will have to invest more in new products, features, etc, which will hurt margins.

Several larger projects being impacted by customer product development
At the same conference, Appen also said that its customers are experimenting with new AI-based products in response to COVID and the changing nature of online advertising. They are switching budget and resources around to accommodate these processes, which is impacting “a handful” of Appen’s programs. In other words, 2HY21 revenues will be impacted by this.

So, while we hate to have to sell a stock after a big decline like we saw yesterday, the fundamentals for APX have clearly changed and we fear there is a lot more downside to the stock from here. We think it can possibly go as low as $5 per share. Which is why we are taking our loss here and are removing it from our Top Picks list.