The Appen Ltd (ASX: APX) share price briefly dipped below $15 per share yesterday. The last time Appen traded around these levels was over two years ago.
Sentiment toward the company appears to be at an all-time low…Could this be a buying opportunity or is there more pain to come?
Appen share price
COVID-19 slows growth
Out of many of the large-capitalisation tech companies on the ASX, Appen seems to have been one of the hardest hit from COVID-19 complications.
Appen has fairly high customer concentration from many of its largest customers, and management seemed fairly confident at the onset of the pandemic that earnings were likely to be stable due to the high usage of its major customers.
Appen’s strong outlook throughout the pandemic suddenly deteriorated when some of its trading updates later in the year indicated that many of its large customers were actually some of the worst affected.
As a result, it became clearer that some of Appen’s customers’ spending and priorities had changed presumably as more discretionary spending was reduced to provision for more essential expenditures.
Is it time to buy Appen’s shares?
If it could be known with 100% certainty that these aforementioned complications were indeed to be transitory, I think an investment in Appen’s shares would be a fairly attractive proposition at these levels.
Management haven’t released any recent trading updates that could potentially provide some insight into its current trading conditions and if its larger customers are beginning to see their spending and priorities normalise back to pre-COVID levels.
If/when this update comes, I think it’s fairly likely that we’ll see a jump in Appen’s share price as the sentiment gradually picks up again.
Alternatively, if management have been overconfident in the company’s recovery and they downgrade guidance, this could result in some further downwards action in the share price as investors seek opportunities elsewhere.
Appen’s shares are certainly a lot cheaper than what they were, but my preference will be to wait for signs of a recovery that will hopefully put some of my concerns to rest.
Buying into downgrade cycles can present opportunity, but also a lot of risk at times.
If you had bought shares in A2 Milk Company (ASX: A2M) when they dipped to $10, you’d be over 30% down on your investment today. Integrated Research Limited (ASX: IRI) shares are another example of a recent downgrade cycle.
These examples are a good reminder of the importance of constantly monitoring your thesis and selling quickly once the thesis is broken.
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