Is the Appen Ltd (ASX: APX) share price a super cheap business to be looking at right now? It just released a trading update.
The last year has been really difficult for Appen. Before today, over just the last month, Appen had declined by 33%. In six months Appen had dropped 66%. Since 26 August 2020, the Appen share price had fallen by 74%.
Over the past 12 months it has been one of the worst-performing ASX 200
(ASX: XJO) shares. Only A2 Milk Company Ltd (ASX: A2M) had seen a bigger drop in the same time period. Appen shares haven’t been this low since 2018.
Is the Appen share price an opportunity?
When the share price of businesses fall, it obviously means the price is lower. But the value on offer isn’t necessarily better. A business can rise and be cheap. A stock can also decline and be expensive.
The market can sometimes become too pessimistic about an ASX share and send a share price too far down, just like it can become too exuberant and make the share price too high. It depends on the situation and what’s happening at the company level and the industry level.
What’s going on here?
Profit growth wasn’t as high as much as the market was originally expecting during 2020, which explains some of the earlier decline in the second half of 2020. However, in February the broker Macquarie Group Ltd (ASX: MQG) put out a note saying that the market was still being too positive about Appen’s expectations.
Macquarie analysts said:
“Increased competition has been partially cushioned by greater demand, but supply increase has outstripped demand. Pricing is not yet a lever to differentiate between outsourced solutions, but as competition intensifies in 2021, we see downside risk to street revenue forecasts as this comes into play.”
At the time of that note (three months ago), Macquarie’s price target was $19. A price target is where the broker thinks the share price will be in 12 months from now.
The Appen result didn’t give investors much confidence a week after that Macquarie note as the share price fell in reaction (and is down heavily since then).
But Macquarie’s latest thoughts are that Appen shares are a hold with a price target of $16 because most investors are now aware of the competition and pricing problems. But the broker still thinks there could be further headwinds that could lead to lower earnings expectations in the future.
Latest trading update
Just today, Appen released a trading update to the market.
The company said that its year-to-date revenue plus orders in hand for delivery in FY21 is approximately US$260 million at the end of April 2021, consistent with the methodology and timing used for the update provided at the annual general meeting (AGM) in May 2020.
Underlying EBITDA (EBITDA explained) for the 2021 financial year ending 31 December 2021 is expected to be in a range of US$83 million to US$90 million, as per the guidance provided to the market at its FY20 result in February.
Rising competition isn’t a good thing for any business. Time will tell how much of an economic moat Appen has. The market doesn’t seem to think it’s a strong moat. There are other ASX growth shares out there that could be able to produce more profit growth. However, the Appen share price has now gone so low it could be a medium term ‘value’ tech play if today is the right price.
You should also read Rask Media’s coverage on the new Appen restructuring.
