Appen (ASX: APX) is one of the ASX businesses that’s doing really well during the COVID-19 pandemic.
What is Appen?
Appen provides data for machine learning and artificial intelligence. Basically, it provides and improves data for the development of artificial intelligence and machine learning products. With more than 20 years of experience in over 130 countries, Appen has firmly established itself as a global leader in this space.
Why Appen is doing so well
Appen is one of the best performing shares on the ASX since the COVID-19 share market sell off. It’s one of the few shares that’s actually higher than where it was in February 2020.
Looking at the Appen share price from between 23 March 2020 to now, it’s gone up by 74%.
A key part of the puzzle is that Appen largely generates its earnings from the big US technology companies. I’m sure you’ve seen that many companies are reducing their spending where possible. Limited travel, low discretionary spending and delayed capital expenditure to maximise cashflow.
The market view may have been that the FAANG shares would cut their spending too. But that hasn’t been the case.
Appen is holding its AGM today and said that its major customers are experiencing high usage. It’s business as usual based on current information. A slowdown in digital advertising spending is having minimal impact on Appen’s major customers so far. However, the economic downturn may affect smaller customers.
Not only is Appen’s earnings doing well, but Appen’s balance sheet remains strong. It has a cash balance of over $100 million. It also has an undrawn working capital facility which is available. Appen continues to see “healthy cashflow and conversion” whilst having low capital requirements.
Is it time to buy Appen shares?
The Appen share price is down 2% right now. At a share price above $30, Appen is not cheap. But it’s pleasing to see that Appen is not suffering in this environment. It’s continuing to invest for product diversification growth.
However, Appen is still expecting margins to be in the high-teens percentage for the FY20 result.
In terms of guidance, Appen said that year to date revenue plus orders in hand for delivery in FY20 of around $350 million at May 2020.
The company’s full year underlying EBITDA (click here to learn what EBITDA means) is expected to be in the range of $125 million to $130 million at an estimated foreign currency exchange of AU$1 to US$0.70 for the year.
Appen did say it’s reviewing its capital management priorities, including the dividend policy.
At the moment it seems like Appen could be a solid buy, considering how low interest rates are now. But for a tech share I’d personally rather buy Pushpay (ASX: PPH) first.
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Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned.
