Appen Limited (ASX: APX) is a global organisation that develops human-annotated datasets for machine learning and artificial intelligence (AI). The company uses speech, text, image and video data in over 180 languages and dialects. Appen’s clients are in the Technology, Automotive and eCommerce industries, as well as many governments globally, for whom they develop and enhance products that use natural languages and machine learning.
Appen has been a sweetheart in the market – rallying approximately 145% this year, until recently. The escalating trade war between the US and China is impacting the global economic outlook, thereby punishing global financial markets. At midday, the ASX 200 is down 2.4% and Appen shares are down 7% - there is a reason for this. During a market sell-off, companies trading on high price-earnings (PE) multiples get disproportionately punished. This is because they are perceived to be more expensive than the market. While Appen is currently trading on a forward PE of 39x, we are willing to hold it because earnings are expected to grow by 30% - a PEG ratio (PE/earnings growth) of 1.3. A PEG ratio of approximately one justifies high PE multiples as the price is supported by an underlying expectation of earnings growth. As the stock price comes off, the PE ratio also declines. While this does present an opportunity for accumulating a position in the stock (since it is now much cheaper), there is still a potential downside risk.
Should you invest in Appen while the price is down?
Investors looking for an entry point might consider waiting until the macroeconomic and political backdrop is in a more favourable state, as this may put a bottom on the falling market and the APX share. For investors with an open position in the stock, it may be prudent to continue to hold as we still maintain a BUY recommendation on Appen and expect the share price to re-rate.
This is not a change in our recommendation on Appen Limited, because the company fundamentals remain unchanged. Appen operates two business divisions – Language Translation and Content Relevance. Technology is growing with the development of mobile communications (phones, tablets, laptops), consumer electronics (games and TV consoles), cloud services, search technology and social media that enable communication and intelligent information retrieval across platforms and languages. This will increase demand for Appen’s services as it feeds the AI for many businesses, therefore, we see a growing market for the Company.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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At the time of writing, the ASR has a position in Appen Limited (ASX: APX).