There are very few stocks that have hit record highs in the midst of the COVID-19 pandemic.
The few that have, have stolen the headlines and none has been more prominent than Afterpay.
Fellow tech stock Appen has been more of a quiet achiever. While its performance this year has been nothing short of extraordinary, it rarely attracts the spotlight of some of its peers.
At its heart, Appen is more a service company than a tech company. The company provides data annotation services across search engines, e-commerce and social media.
Its clients are not small either. Microsoft, Google, Yahoo, Baidu, Amazon, eBay, Alibaba, Facebook, Instagram, Twitter and LinkedIn all use Appen’s services.
The company has been one of the most sought after stocks on the market since listing in early 2015.
While the company sold off heavily along with the rest of the market through the start of the COVID-19 pandemic, in late May Appen said the pandemic had only had a “negligible” impact on its business, propelling its shares higher.
The company also reaffirmed its earlier guidance, pushing a number of brokers to increase their valuations on the stock, praising the company’s resilient business model.
“Appen is leveraged to the surge in time spent online through its world class data labelling, image and language recognition platform for large technology companies,” RBC Capital Markets analyst Garry Sherriff said.
“Appen is profitable, generates high cash flow, has a strong balance sheet and a long growth runway ahead of it.”
RBC is upbeat on Appen’s ability to beat its guidance. With 87 per cent of the company’s business done in US, it is likely to see further upside if the Australian dollar remains below the US70¢ level Appen’s forecasts are based off.
“FX has averaged [US]67¢ year-to-date so if [it] remained around this level for [the] remainder of calendar year then [it] could see 4 per cent upgrade,” Mr Sherriff said.
Macquarie is also upbeat on the stock, with Appen initiating coverage on the stock with a bullish $38.00 price target, saying it expected the company would well and truly surpass guidance.
The broker was forecasting the company would report full-year earnings of $136 million, pointing to its generally conservative approach to guidance.
“Appen has consistently upgraded and beat earnings guidance since inception, and our forecasts remain above the top of the CY20 $125 million to $130 million range,” analyst Jay Shyam said.
“We see the risk/reward skew as favourable, given industry tailwinds and Appen’s position within the broader ecosystem.”
Macquarie was tipping Appen’s Relevance segment, which provides annotated data used in search technology, would be able to find several long-term opportunities while also expanding into other verticals such as government and autonomous vehicles.
But the alarm bells have been raised recently, with several of the company’s senior management taking profit on the raging share price.
Chairman Chris Vonwiller sold 2 million shares citing “personal reasons”, delivering himself a $58 million payday.
Chief executive Mark Brayan sold 95,535 shares, pocketing $2.9 million, to satisfy tax obligations and diversify his personal investments, while non-executive director Bill Pulver sold 275,000 for a windfall of about $8.4 million.
The sales were rather timely too, coming just a few days after the company reaffirmed its guidance and reported the impacts from COVID-19 had been negligible.
Room for uncertainty
Analysts have also pointed out a number of key risks for the company, including its lack of recurring revenue and high concentration of customers.
“Appen still generates most of its revenue from purchase orders rather than recurring subscription or platform fees,” Bell Potter analyst Chris Savage said.
“The award of these PO’s can be lumpy and unpredictable, and means there is a lack of visibility or certainty of revenue beyond the short term.”
This creates a huge risk for the company, particularly in a tight economic environment.
“The key risk to Appen is that customers could reduce spending or terminate projects on short notice, and there is risk that Appen’s investment in sales and marketing could take longer to deliver results,” Citi analyst Siraj Ahmed said.
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That risk could hurt Appen more than most because of its high concentration of customers with more than 80 per cent of revenue coming from its top five clients.
The most bullish analysts have played down that risk however.
“It is worth noting that this risk is somewhat mitigated by these top five customers having hundreds of projects between them. It is simply not the case that one broad decision by a customer could create a sudden revenue hole,” Macquarie’s Mr Shyam said.
Despite several concerns for the company, it broadly has favour with the sell-side community, with nine of the 12 analysts who cover the stock rating it a buy rating and none giving it a sell recommendation.
No broker has had a sell rating on the stock since August.
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