I had to pinch myself today as shares of market darling Appen Ltd (ASX: APX) slumped 10%.
Indeed, it seems like forever ago that shares like Appen and Afterpay (ASX: APT) had a really bad day.
Is It Time To Exit Appen?
For the uninitiated, Appen is a machine learning and artificial intelligence (AI) business.
Contrary to what most people think Appen does, it does not create its own artificial intelligence computer programs. Instead, Appen uses a network of over one million people around the world to provide a human feedback loop for software programmers.
For example, let’s say the software engineers behind the Google Assistant need to determine if their smart algorithm for booking a dinner reservation works everywhere around the world (i.e. not just in the USA).
The engineers will send Appen a project for, say, 10,000 users to trial and error the new dinner algorithm in their home market. For a small fee, the crowd of Appen users who test the algorithm try the dinner reservation feature and then provide specific feedback through Appen’s platform. This ‘human feedback’ is then incorporated by the engineers to make their software better.
Appen calls this service Content Relevance and they provide datasets to all types of clients around the world. It also has a growing language translation business.
Up, Up & Away
As part of our Rask Invest subscription service I looked at Appen shares quite a few times but there were always a few things I wasn’t been able to get comfortable with — clearly, I’ve missed out on its massive gains over the past few years!
My first issue was that while I thought Appen had some great tailwinds at its back, I found it difficult to value the shares. For example, though they have done a good job of managing the risks with regards to labour laws, I was not certain what the implications would be if things went awry.
In the past, I also wasn’t sure how Appen fit into the competitive landscape since it deals mostly with extremely large technology companies. In recent years, some organic growth and a helping of acquisitive growth enabled Appen to lessen the risk that a big client (e.g. a big US tech company) would stop using its services.
Lastly, I thought a meaningful part of the Appen growth story relied on acquisitions and I’m always a little dubious of companies growing by acquisition because more often than not they don’t work out for shareholders. For example, in the process of acquiring other companies, the acquirer often uses debt or sells more shares to new investors which can dilute or hurt the most loyal long-term shareholders.
Again, Appen seems to have done a good job of growing its free cash flow while also making strategic acquisitions.
While Appen shares fell today they have been a great performer for Australian investors over the past few years. I can see why ASX investors would want to hold Appen shares for the next five-to-ten years given the vast growth opportunities available in the AI market globally.
However, though I could prove to be wrong (again) I’m still not a buyer of Appen shares at today’s prices. I’d need a more compelling valuation.
And fortunately for me and Rask Invest, there are more than 2,000 ASX shares and thousands more globally. What’s more, I have enough great companies in my portfolio and on my shortened watchlist which appear great value today.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: At the time of publishing, Owen Raszkiewicz owns shares of Alphabet/Google.