| Stock: | Appen Ltd | ||
| Exchange: | ASX | Symbol: | APX |
| Date: | 05-Oct-22 | Latest price: | A$3.29 |
| Market Cap: | $406 m | Fair Value: | A$2.99 |
| Forward DY: | 3.16% | Payback (Years): | N/A |
| Financial Y/E: | 31-Dec-22 | Rating: | HOLD |
| Sector: | Technology | Industry: | IT Services |
| Investment Theme: | Technology | Macro Trends: | A.I. |
Summary
Appen (APX) is trading at a discount to our estimate of fair value. Our recommendation is HOLD in the current bear market.
Valuation
We reduced our fair value estimate for Appen (APX) by 74%, to A$2.99 per share, based on the following projections:
- real organic long-term growth of zero (formerly 15%);
- EBITDA margin of 12% (formerly 15%);
- capital expenditure of 5.2% of revenue (formerly 5.4%);
- working capital of 0.4% of revenue (formerly 0.6%); and
- an effective tax rate of 25%.
We selected a payback period of 10 years to reflect the company’s small cap size and a competitive industry.
Business Profile
Appen provides quality data solutions and services for machine learning and artificial intelligence applications for technology companies, auto manufacturers and government agencies. The company’s business segments are Relevance; Speech & Image and Others. Relevance generates the most revenue, providing annotated data used in search technology for improving the relevance and accuracy of search engines, social media applications, and e-commerce. Geographically, the majority of revenue is derived from the USA.
Performance
“Appen’s half year results reflect lower earnings due to challenging external operating and macro conditions, resulting in weaker digital advertising demand and a slowdown in spending by some major customers…” (1H FY22)
FY22 EBITDA margin is expected to be materially lower than FY21.
Capital structure
APX has net cash (after deducting capitalized leases) of $33 million.
Disclosure
Staff of The Patient Investor may directly or indirectly own shares in the above company.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.