AU earnings: Appen - from a pandemic bubble to 95% loss

As Appen prepares to report on the 28th of August 2023, this week's bonus edition of Investor Spotlight examines the company's recent performance, preview its interim results, and discuss the investment case for its stock.

A speculative stock whacked by higher interest rates

Appen's shares have been a perennial disappointment over the past two years. Following the burst of the pandemic "everything bubble," the stock has lost more than 95% of its value. Largely, this is a tale of interest rates.

Appen falls squarely into the category of a speculative growth stock, with the prospect of sustained profitability a distant future consideration. Because of this, higher interest rates – specifically, yields on long-dated government bonds – compress the company's valuations, as the higher discount rate diminishes the present value of highly volatile future cash flows.

The reset button

In May, the company held its Annual General Meeting and discussed the challenging market backdrop for the global technology sector. Chairperson Richard Freudenstein stated that the business would undergo a "reset," which included realigning its cost structure with its revenue outlook, raising capital to support its strategy, and narrowing its focus on generative artificial intelligence.

APX vs AU10Y chart

Revenue forecast

Appen is expected to deliver another disappointing set of results when it presents its interim results. Revenue is forecast to slide a further 21.5% from a year earlier, dropping from $205m in the second half of FY22 to $143m in the first half of FY23.

The company's net loss for the period is forecast to narrow to $35m; however, that figure is distorted by a one-off impairment charge in the previous financial year. Analysts expect the business will remain in a loss-making position for FY23; no dividend will be paid.

Appen earnings and revensue history chart

A tough investment case to make

Given the business is practically back to square one, the likely goal of management, and the critical focus from investors, will be Appen's strategic outlook. With the hype surrounding artificial intelligence and its growth prospects, Appen's future success will hinge on how it can position itself to benefit from this trend.

This will likely entail assessing the company's capacity to leverage its platform for this purpose, proving that it is expanding its customer base, and demonstrating that it can create operating leverage to scale up and grow the business.

Share price and analysts' opinions

Ultimately, the investment case for Appen is based on believing the market is wrong about the company's growth prospects and that it has a product that can drive strong and sustainable sales.

Appen's share price is currently trading at sales and earnings multiples below 1x, implying that the top and bottom lines will continue to shrink. A saleable narrative and an executable strategy from management may reverse this trend; eventually, the company must prove it is arresting its slide. There is widespread negativity towards Appen shares.

Appen historical price to sales ratio chart

Analysts are neutral on the stock, according to data compiled by Reuters, although that's with a bearish skew; the consensus rating is a hold, with seven analysts recommending that action, four suggesting a sell, and one a strong sell. The consensus price target is at a premium to current prices at $2.31.

Broker calls chart

IG client sentiment

IG's clients are profoundly bullish on the stock, although that could be a contrarian signal. 96% of clients are long Appen shares, whilst 4% are short, reflecting the retail trader bias to counter-trend.

IG client sentiment chart

Appen technical analysis

The technicals convey the major bearishness towards Appen shares. In the long term, the stock is in a downtrend. In the short term, it is grinding lower and trading within a downward trend channel. Technical support could be found around the psychological level of $2 per share. Sellers have emerged at the 20-day moving average; a break above that level could see a run towards $2.50.

Appen monthly chart