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HY22: Why the Appen (ASX:APX) share price is sinking

The Appen Ltd (ASX: APX) share price has sunk. It’s down by more than 20% after giving an update.

Appen says it’s a global leader in data for the AI lifecycle relating to data sourcing, data annotation and model evaluation by humans. It says it enables organisations to launch innovative AI systems. It has more than 1 million skilled contractors that speak over 235 languages, with an advanced AI-assisted platform.

FY22 update

Appen firstly gave an update about its 2022 first half result.

Let’s look at some of those numbers for the first six months of 2022:

  • Revenue dropped 7% to $182.9 million. This reflected a lower contribution of its global division due to weaker digital advertising demand and a slowdown by spending by some large customers
  • ‘New market’ revenue was down 6% to $45 million, impacted mainly by lower global product revenue. Excluding that, new market revenue was up 35%
  • Underlying EBITDA was down 69% to $8.5 million due to lower revenue and investments in ‘transformation, product and technology’, as well a negative effect from foreign currency
  • Underlying net loss after tax of $3.8 million, compared to a $12.5 million net profit after tax last year
  • Statutory net loss after tax of $9.4 million, compared to a net profit of $6.7 million last year due to more spending on amortisation on product development

Appen put the first half’s challenges down to external operating and wider economic conditions, resulting in weaker digital advertising demand and a slowdown in spending by some major customers. Losses are not good news for the Appen share price. How much is a business worth if it’s making losses? Less than when it’s making a profit if it’s declining in scale, it seems.

FY22 outlook

The ASX tech share said that it expects to achieve “higher volumes” in the later part of the second half due to the delivery of seasonal projects and ramp-up in existing projects.

However, there was no improvement in July trading, so there is uncertainty about the continued slowdown and the exposure to weaker digital advertising demand. The conversion of forward orders to sales is less certain this year compared to prior years.

It’s expecting to generate more EBITDA in the second half than the first half.

Appen is reviewing all investments in the business to accelerate productivity improvements and profit margin expansion.

Management believe that the AI training data market will continue to grow in the longer-term.

Final thoughts on the Appen share price

Another painful drop for the business. Now it’s reporting losses as well. At some point the sell-off may be overdone, but trying to ‘catch a falling knife’ is not my idea of an ideal investment strategy.

I don’t know enough about the business or its competitive position to say whether this is just a temporary decline, or it’s just part of an ongoing trend downwards. There are other ASX growth shares I’d rather focus on.

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