Appen Limited (APX)


Quick Stats

Appen Limited, provides data solutions and services for machine learning and artificial intelligence applications for technology companies, auto manufacturers, and government agencies in Australia, the United States, and internationally. The company's business is to collect, classify, translate, review and label large volumes of image, text, speech, audio, video and other data used to build and train AI systems. 

Training data is labeled data used to teach AI models or machine learning algorithms to make proper decisions. For example, if you are trying to build a model for a self-driving car, the training data will include images and videos labeled to identify cars vs street signs vs people.

Industry: IT services

Expected Market Growth: 25% CAGR (2021-2024)

Market Cap: 1,163 (SMALL CAP)

Segments: SEO, autonomous driving, augmented and virtual reality (eye tracking), AI-enabled chat bots, voice interactors, e-commerce.

Quick Checklist



  • Revenue growth for the last 5 to 10 years - (CAGR 88.21%)
  • Operating margin - (SLIGHT DECLINE ON THE LAST YEAR)
  • EPS growth - (CAGR 39.33%)
  • Shares - (INCREASING)
  • ROI & ROI - (DECREASING AS IT GETS BIGGER)

Press Release

Completed the acquisition of Quadrant Global Pte Ltd. for $45 million on August 25, 2021. To acquire 100% of the share capital of Quadrant, Appen will make an upfront cash payment of $25 million and a potential additional payment of up to $20 million in Appen shares to be issued upon achieving revenue milestones in 2022 and 2023. The upfront cash payment will be funded from existing cash reserves. Quadrant is a company focused on mobile location and Point-of-Interest, which operates in the analytics and intelligence market. Such market is expected to grow at 27% CAGR (2020-2027)

Annual Report

Risks

The main risk on technological companies is very much related on how disruptive the market in which they operate. In the AI market there can be very radical changes due to regulations and client demands. 
On the other hand, it is a market with a huge potential and great opportunities ahead:
  • US digital advertising spend: 21% growth in 2021
  • Global AR/VR spend: US$73B by 2024
  • Speech and voice recognition: 19% annual growth
  • AI training datase market: 22.5% annual growth
  • AI in computer vision 40-51%: annual growth
  • LIDAR market size: US$10B by 2025
AR/VR: Augmented Reality / Virtual Reality.
Computer Vision: what enables computers and systems to derive meaningful information from digital images, videos and other visual inputs.
LIDAR: Light Detection and Rangin (remote sensing method that uses light in the form of a pulsed laser to measure ranges).

Competitive Advantage

No debt

Executive Team 

Short term incentive: achievement of specific performance-related key financial metrics. 

Long term incentive: sustainable growth in earnings and shareholder value

Salary VS Worth in Shares

  • CEO (Mark Brayan): 6.6x 
  • CFO (Kevin Levine): 2.9x 
  • SVP (John Kondo): 0.23x
  • SVP (Tom Sharkey): 0.48x
The executive team seems to be aligned with the company's future success. As for, more than 50% of the salaries of the  CEO and CFO rely on achieving future healthy and sustainable financial results and shareholders' value.  

Valuation

3 Possible scenarios

Optimistic (company gets back on track and follows prior 2019 trend)
  • Revenue annual growth 25%
  • Operating Margin 14%

Normal (follows 2020 and 2021 (estimated) trend):
  • Revenue annual growth 15%
  • Operating Margin 12%

Pessimistic (doesn't manage to scale up):
  • Revenue annual growth 10%
  • Operating Margin 10%

Conclusion

We can consider Appen Limited a growth company as haves achieved amazing results, in eight years has multiplied its total revenues by 10x and EPS has grown at an annual rate of 88,21%. Although going more into detail we find a considerably slowdown on its 2020 results.
  • Revenue increase of only 12% 
  • Decrease in Operating Income by 19%
Since August 2020 its price has declined 75%, which is logic as the market was expecting the company to keep its growth track record. Until the company demonstrates again that it is in fact a growth company, substantially increasing its revenue and operating margins, the market will keep the current low valuation multiples. 

It is important to keep this company on the watchlist as someday might become a turnaround and be able to grow again is it used to. 
  • Release of full year report (February 24-29)
  • Release of full year report (August 25-27)


Sources





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