Why the Appen share price crashed 12.43% on Thursday

ASX-listed machine learning and artificial intelligence company Appen (ASX: APX) was punished by investors on Thursday, December 10, after management lowered their full-year earnings (EBITDA) guidance.

Yesterday’s downgrade builds on mounting bearish sentiment around the company: The stock has been in a downtrend since early November, losing close to 30% of its value in that period. Investors continued to bid the stock lower in response to the earnings downgrade, with APX closing out Thursday’s session at $26.20 per share, representing a sharp 12.43% pullback.

The downgrade in focus

Centrally, this earnings downgrade was primarily driven by a change in the behaviour of Appen’s core consumers, leading to a weaker than expected operational performance during the current quarter.

Appen, which has historically seen strong revenue growth during the fourth quarter, said that such growth had not materialised this year.

As a result of this, the company said it now expected FY20 earnings (EBITDA) to come in at the range of between $106-109 million, around 15% lower than the company’s previous EBITDA guidance of between $125-130 million.

Appen, in attempting to explain the behaviour of its core customers, said:

'Our major clients are reprioritising resources towards new product areas that enhance their long-term resilience and value which is currently impacting work volumes on some large mature projects.'

Despite this ‘short-term’ earnings impact, the company noted that the key long term trends supporting Appen’s growth remain strong, while also saying:

‘This new product development trend is positive for us and we are seeing a significant increase in the number of new projects amongst our major customers, albeit some are early in their lifecycle.’

Appen share price: The analyst take

Analysts from the Royal Bank of Canada described the downgrade as disappointing, though nonetheless retained their bullish $40.00 price target and Outperform rating on the machine learning and artificial intelligence company .

RBC analysts, like Appen itself, noted that this earnings downgrade is somewhat surprising given the strong performances from the likes of Facebook and Google in the prior quarter, noting that Appen’s:

‘Core customers are US technology players who represent +80% of APX's revenues and have seen a re-acceleration in their search and advertising revenues in recent quarterly results.’

This outcome then, mused the investment bank’s analysts: ‘Begs the question - Is it customer behaviour changing or also competitive pressures?’

Despite this setback, Appen did note that it expects ‘strong growth rates’ to resume in 2021. That reassurance, did little to calm the market’s nerves on Thursday, it would seem.

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