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This year. We're going Beyond.

Here’s why the Appen (ASX:APX) share price is sinking

The Appen Ltd (ASX: APX) share price is sinking after giving investors a trading update.

Not sure what Appen does? It’s a global player in provider human-annotated datasets, including speech, text, image and video for machine learning and artificial intelligence. It works in over 180 languages with a global base of more than 1 million contractors. Some of its clients are the biggest tech companies in the world.

What was in the Appen trading update?

Appen has previously warned that COVID-19 may impact earnings with a slowdown in digital ad spending, IT spending, reductions of services from smaller customers, interruptions to global supply chains and the suspension of face-to-face projects such as audio data collection.

When it released its FY20 half year result it reported strong growth, despite a slowdown of new business development and deferred renewals. And it was only expecting a small negative impact from ad-related programs.

In the third quarter it did see revenue lower than expected, its major customers released strong quarterly results and online advertising bounced back. It also knew that the fourth quarter normally made up 30% of its full year result, which is why it didn’t change its guidance.

The disappointing news

After just completing its November results, the fourth quarter of 2020 hasn’t ramped up like it normally does. COVID-19 disruptions are being blamed, particularly in California where its biggest customers are located. California’s pandemic lockdowns have recently intensified.

It’s now expecting FY20 underlying EBTIDA (EBITDA explained), including the impact of the stronger Australian dollar, to be in the range of $106 million to $109 million. This is a guidance range of $108 million to $111 million using the same assumed exchange rate of AU$1 to US$0.70 for the second half.

Second half underlying EBITDA is expected to grow by “30% plus” over the first half applying first half exchange rates to the second half performance.

A silver lining?

Appen said its major clients are prioritising resources towards new product areas that enhance their long term resilience and value which is currently impacting work volumes on some large projects. Appen said this development trend is positive for the company, though some projects are early in their lifecycle.

It also said that it continues to win new customers in markets less impacted by COVID-19, including in new business areas such as shipping, automotive, education and health care.

Appen also said that the long term trends for its business remain very positive, with spending on artificial intelligence growing rapidly 28% per year. Management expect the AI adoption will accelerate in a post-pandemic environment. Online advertising is expected to rebound strongly in 2021 according to analyst forecasts.

Management believe there will be a return to strong growth rates in 2021 in line with industry trends in 2021.

Times like this could prove to be a buying opportunity if you’re interested in the business. Appen itself seems to think this is a short term issue. But there are other ASX growth shares that I’d prefer to buy first like the ones I wrote about in this article about 2021 ideas, including Pushpay Holdings Ltd (ASX: PPH).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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