The Appen Ltd (ASX: APX) share price is getting a lot of attention today after revealing an investor presentation. It’s down 17% in reaction today and down a lot more this year.
What was in the presentation?
Appen is presenting at the Macquarie Group Ltd (ASX: MQG) investor conference.
Firstly, Appen explained why FY20 revenue only grew 12% and underlying EBITDA (EBITDA explained) rose by 8% to $108.6 million.
It said that the Australian dollar strengthened, hurting revenue translation. COVID impacted face to face selling, though it saw more wins in the fourth quarter of 2020. COVID interrupted many businesses last year and that reduced their digital advertising spending, a main source of income for major Appen customers who are now investing in new AI products that are less reliant on advertising and less reliant on personal data. Major customers are also responding to data privacy and anti-trust concerns as well as heightened competition.
Appen then went on to explain why its growth has not been consistent. It said AI product development is experimental. The performance of the underlying model is unknown until it’s built and tested in the real world. This results in an iterative process in which models are built, tested and so on. Training data is an essential component of machine learning and is tied to customer product development lifecycles. Training data volume requirements are not always linear.
Warning: There have been some changes in the market
Appen said a number of things in the market have not changed like demand for relevance data, pricing, no shift to insourcing, AI development techniques and so on.
But there are a couple of changes. One is something I’ve already noted, that customers are developing new AI products in response to COVID.
However, Appen also said that competitors outside of relevance are maturing. Management said this is unsurprising. The presence of competitors and funding demonstrates that it’s an attractive market. Appen said it maintains its leadership position and that customers still depends on it. However, management acknowledged that it will have to maintain its flow of new product features and fight harder to stay ahead.
Summary thoughts on the Appen share price
Appen is doing what it can to remain better than the competition. It revealed it’s looking beyond data collection and labelling for additional growth paths in the broader AI market. The company expects these will be technical in nature and build on its products, customer base and market position.
The company plans to release more details on its platforms on 20 May 2021.
It’s good to hear that Appen has a plan, but rising competition could be bad for revenue and margins in the future. It won’t be able to command a premium if it’s not the only competent provider. At some point the Appen share price will become good value as it falls – but I don’t know at what level that is because the trajectory of Appen’s profit is hard to judge.
There are other ASX growth shares with easier paths to success in my opinion.
