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Date : 22/03/2021

Appen Limited



Market Cap : $2.27 Billion

Dividend Per Share : $0.05

Dividend Yield : 0.53 %


52 Week Range : $15.15 - $43.66

Share Price : $18.02

Appen is the market leader in its industry that supplies the raw material for AI firms. Trading cheaper than any of the WAAAX stocks on a P/E basis, we recommend investors to "Buy"

Company Analysis

Appen Limited (ASX: APX) is a very important player in the artificial intelligence industry. They offer data sets that can be bought and used to train systems for machine learning (ML) and improved artificial intelligence (AI). In order to build successful and accurate ML and AI models that deliver results like when humans are operating the systems, very large volumes of data are required to train the model prior to seeing accurate results. Appen supplies this much needed training data. The data is categorized by humans and is of high quality that is ready to be applied by customers in order to build AI systems.


Appen shares had gained over 12% since we last recommended the stock. After reaching a high of $25.31 a share and on a recovery track, it has been downhill as selling pressure mounted. The average volume of trades in Appen shares has increased sharply – leading to massive corrections in recent weeks. The volume data can also be seen in the share price chart above. We all know the WAAAX stocks. Currently, Appen shares are trading at the lowest P/E ratio among all the high-growth WAAAX stocks. This correction opens up an opportunity for investors and these opportunities do not come around too often.

FY2020 was a challenging year for Appen. Appen shares recovered very quickly from the stock market slump and the shares were soaring at all-time highs by August. Appen, like most technology stocks on the ASX are generally overbought or oversold during its ups and downs. The share prices thus reflect a lot of pressure that is being added by either the bulls or bears and the stock is subject to high degrees of volatility and lots of momentum swings.

The first shock experienced was due to investors expecting a growth of over 25% during the 1H FY2020 performance. The revenues from Speech & Image which we explained in the previous section of this report turned out to be an underperformance in the hence, the stock came under massive selling pressure as investors sold-off. This can be explained from the above chart where we can see large spikes in selling volumes.

In December, we saw a similar pattern as investors once again added selling pressure to APX as Appen released an announcement that they continued to experience challenges when navigating through the pandemic. There has been a slowdown in:

  • Digital ad spending
  • Reduction in IT/digital spending
  • Cancellations from the smallest customers
  • Interruption in global hardware supply chains
  • Suspension of f2f projects that are required for audio data collection.

Appen confirmed that their Q3 revenues were below expectations due to the above reasons. Following on, shares once again slumped in February 2021 as analysts and investors were expecting a more robust Q4 performance and a bullish outlook.

FY2020 Earnings

So, what really happened with the FY2020 full year results?

  • Revenue up 12% to $599.9M
  • Underlying EBITDA of $108.6M up 8%, statutory EBITDA up 23%
  • Growing customer base including 136 new customer wins in 2020
  • 34% increase in the number of projects with top five customers
  • Committed revenue increased to 31% of 2H20 total revenue, up from 12% in 1H20
  • China revenue growing at 60% quarter on quarter
  • $78M in cash on 31 December 2020
  • Final dividend of 5.5 cps, 50% franked, up 10% on 2019 final dividend

Source: Appen

Appen has seen strong demand from its existing customers for its products and they have underpinned the consistent revenue growth. In addition to this, Appen has reported that they have added several new businesses to further diversify their revenue base.

Appen’s investments in sales and marketing yielded 136 new customers in 2020 across a variety of sectors and data types. Many of these customers are small but they increase Appen’s market penetration and lay a strong foundation for growth in coming years. The Company also expanded the number of projects across its top five customers by 34%, supporting many new product developments.

Revenue in China grew 60% each quarter in 2020, winning market share and 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. Performance in Q4 for Appen was strong after a flat couple of quarters due to the pandemic.

Key Performance Drivers

Annual Contract Value (ACV)

  • 399% increase in ACV to US$124.4M (1 Feb 21 v 2H19)
  • Increase underpinned by expansion of enterprise-wide platform agreement with existing major customer
  • Some smaller customers continued to be impacted by COVID-19 in 2H20

Revenue Type – Project Revenue and Committed Revenue

  • 343% increase in committed revenue (2H20 v 2H19)
  • $92.0M of committed revenue in 2H20, 31% of total – up from $36.3M in 1H20, 12% of total
  • Major programs are highly retentive
  • Continued growth in major customers
  • Adding new customers each year to diversify the customer base

Source: Appen

Relevance Segment

  • Revenue $538.2M, up 15%
  • EBITDA up 8% to $112.7M, including growth investments
  • 2H20 growth impacted by COVID-19 re-shaping customers’ activities and priorities
  • Continued to deliver high-quality data during pandemic due to resilience and strength of remote work crowd model (1 million+ crowd, 170+ countries).
  • 60% CAGR FY15-FY20
  • Relevance continues to demand skilled, diverse human annotators at-scale and ongoing data refresh
  • Investing in crowd management technology and processes to increase productivity.

Source: Appen

Speech & Image Segment

  • Revenue $61.2M, down 10%
  • Revenue cyclicality due to product life cycle, timing of customer investment
  • New business activity hampered by COVID-19
  • EBITDA down 42% due to lower revenue and impact of growth investments
  • 14% CAGR FY15-FY20
  • Increased projects in AR/VR and chatbot growth markets.

This is where Appen’s performance slipped during the financial year and Appen’s management reckons that the cyclicality of their product and programs led to this decline in the Speech & Image segment.

Source: Appen


Appen’s growth rate has been affected by the pandemic and in our estimates, we are accounting for the fact that revenue growth in FY2021 will be modest 4%-5% given that the USA, Europe, and Asia will be taking the better part of this year to recover from the pandemic. Therefore, we have taken a conservative approach for this financial year. Following on, however, Appen should start growing consistently as all their clients recover from the pandemic.

EBITDA and EBITDA margins will not jump either given that efficient operations will be challenging in the short-term. Following a recovery form the pandemic, however, we expect Appen to breach the 19% EBITDA margins mark once again as economies of scale kick in, underpinned by an expansion of recurring revenues from institutional clients.

The global spend on AI is forecasted to reach US$110 billion by 2024, from just US$37.5 billion in 2019. The tailwinds in the industry play into the high valuation for Appen. It is worth noting that Appen is the largest global player in this space, and they are continuing to invest for growth. The entry into the Chinese market has been taken on very well by customers in China and the expectation is that the high quarter-on-quarter growth rates will continue to remain north of 60%.

The long-term outlook for Appen is thus robust, however, there are a couple of challenges in the short-term that the stock has been susceptible to and may continue to do so:

  • Strong selling pressure from bears
  • Rising bond yields result in devaluations for technology stocks

Based on our projected earnings estimates and current market capitalisation, the valuation multiples of Appen are:

The P/E of 45.34x that Appen shares are trading at is the lowest among all the WAAAX stock that trade on the ASX. Given that the growth outlook is robust for the industry and the role Appen plays in the overall development of the machine learning and artificial intelligence industry, the current ratio does seem to be slightly deflated. In other words, favourable conditions have the potential to increase the share price very soon (once again).


Appen is the largest global player in this space. Their data sets are essential to the overall development of the machine learning and artificial intelligence industry. Strong finances, sound fundamentals, and optimistic future lay ahead for Appen – indicating that the current prices and valuations mean shares are trading fairly cheap relative to its technology peers. We recommend long-term investors to “Buy”.


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