Appen Limited (ASX: APX) shares were hammered yesterday, falling 11.3% after reporting 1H19 results. This morning, shares have bounced back and are up nearly 5%.
Appen provides data for machine learning and artificial intelligence. Basically, it provides and improves data for the development of artificial intelligence and machine learning products. With more than 20 years of experience in over 130 countries, Appen has firmly established itself as a global leader in this space.
Appen shares fell heavily yesterday despite reporting revenue growth of 60% and a 33% increase in profit. You can read all the key points of the report here.
Before exploring what Appen’s future could look like, there’s one important note to make. The 11% share price decline yesterday was preceded by a 10.7% rise the day before the results, so while headlines might suggest doom and gloom, the share price is still higher than it was at the beginning of the week.
As was mentioned in the results coverage yesterday, Appen is already starting to see an impact from the acquisitions of Leapforce and Figure Eight. Speech and image data sales was another highlight of the report.
However, there were two more key opportunities identified that could become important growth drivers for Appen in the near future.
The first was government. Appen has noted that governments are beginning to increase investment into AI for multiple different uses. According to the Washington Post, both the US and China have massively stepped up spending on AI capabilities, with the US Defence Department allocating $2 billion over the next five years.
Government projects or contracts can be an ideal source of growth because they are often high-value, long-term or both. As Appen rightly notes, managing government data has high barriers to entry because of the need for cleared and approved personnel and facilities.
With the acquisition of Figure Eight and Appen’s secure data annotation capabilities, Appen could be in the ideal position to take advantage of this trend.
The second “emerging growth pillar” that Appen identified was China. The Chinese AI market is currently growing at 55% per year and is forecast to be worth $14.3 billion in 2020.
Appen is positioning itself to take advantage of this market and has a leadership team in place. The company is currently in the process of building sales, client services, HR, recruiting and operational teams in order to expand into the growing market.
Buy, Hold or Sell?
As was mentioned in yesterday’s article, it is very difficult to quantify Appen’s growth potential. It should also be clear from today’s share price rise that Appen shares don’t tend to remain on sale for very long.
I think if you want to buy Appen shares, you need to have a clear price target and watch the shares closely because buying opportunities are unlikely to last.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.