The Appen Ltd (ASX: APX) share price is down around 62% since 26 August 2020. What’s going on?
Why the Appen share price is down so heavily
It has been a difficult 12 months for Appen. COVID-19 has certainly been affecting things and profit margins are suffering.
Appen’s share price decline started after the HY21 result. In constant currency terms in that result, revenue increased 16%, underlying EBITDA (EBITDA explained) fell 2% and underlying net profit after tax (NPAT) fell 12%. In actual currency terms, underlying net profit fell 3%. This may not have been a bad result considering the COVID-19 pandemic was still having wide-ranging effects.
The company then warned in December 2020 that the fourth quarter of the financial year ramp up it normally sees didn’t occur. That was problematic because the fourth quarter revenue normally averages almost a third of its full year result.
Appen said in that December update that COVID-19 had disrupted and reshaped the priorities and activities of customers, especially in California, the home of the biggest customers where pandemic lockdowns have recently intensified. It has also impacted the face to face sales and customer engagement practices. In this update it also gave an underlying profit downgrade of underlying EBITDA from a range of $125 million to $130 million, down to a range of $106 million to $109 million (or $108 million to $111 million at the same exchange rate).
FY20 underlying EBITDA came in at $108.6 million, up 8%, whilst underlying net profit fell 1%.
Is the Appen share price worth looking at?
Nearly all businesses are worth looking at. But a big fall in the share price doesn’t mean that it’s seriously better value.
Appen is guiding that there will be more underlying EBITDA growth in FY21, so that’s a positive. It’s expected to increase by 18% to 28% to a range of $120 million to $130 million.
Management pointed out that Appen has $78 million of cash, no debt, a good cash conversion rate and it keeps delivering growth. In other words, they think the business is still worth backing.
There are also pockets of positivity. Revenue in China – despite all the friction with the West – “grew 60% each quarter in 2020” according to Appen. It said that it’s winning market share and this is providing a solid base for future growth. Customers in China include the country’s largest technology companies as well as autonomous vehicle, health and education technology providers.
Looking ahead, Appen said that the “combination of new customers and projects, higher committed revenue and growth in China, along with our existing customers and programs, has improved Appen’s market position and set a strong foundation for further growth in 2021.”
It’s good to see that Appen’s management is still being optimistic. However, there are concerns about rising levels of competition – this is particularly true from the brokers at Macquarie Group Ltd (ASX: MQG) that don’t think Appen’s share price is going to get back to where it was last year any time soon.
Summary thoughts
Using CommSec estimates, the Appen share price is valued at 32 times the estimated earnings for the 2021 financial year and 23 times the estimated earnings for the 2023 financial year.
I’m not sure if Appen is a clear buy, though those above valuation numbers look more attractive. It used to be one of the highly favoured ASX growth shares, along with names like Xero Limited (ASX: XRO) and Afterpay Ltd (ASX: APT). However, Appen’s market position and growth may not be as strong as some investors were thinking.