Appen Ltd (ASX:APX) shares surge higher on guidance upgrade: Should you invest?

The Australian share market may be deep in the red for a third day in a row, but that hasn’t stopped the Appen Ltd (ASX: APX) share price from surging higher this afternoon.

At the time of writing the tech company’s shares are up 17% to $13.06.

Why are Appen’s shares surging higher today?

This afternoon the global leader in the development of high-quality, human annotated datasets for machine learning and artificial intelligence provided the market with an update on its expectations for FY 2018.

According to the release, the company has been experiencing strong demand for its services recently. Management revealed that this has been driven by “a sharp increase in monthly revenues, largely from existing projects from existing customers.”

In light of this, the company expects its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the 12 months ending December 31 to be in the range of $62 million to $65 million.

This compares to its previous guidance for underlying EBITDA in the range of $54 million to $59 million, representing an increase of 14.8% to the low end of its previous guidance and a 10% increase to the high end.

It will also be a 120% to 131% increase on FY 2017’s result. Though, it is worth noting that some of this year’s EBITDA is being generated by the Leapforce business which was acquired late in 2017 for US$80 million.

Management’s forecasts are based on an average exchange rate of 80 U.S. cents and warned that they are susceptible to upside or downside factors including timing of work from major customers and currency fluctuations.

Should you invest?

Despite its shares surging higher today, I still think that Appen is the best value share in the WAAAX group of companies which also includes WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO).

As I mentioned here yesterday, Appen’s shares were trading at 24x Citi’s FY 2019 earnings estimate of 44.7 cents per share yesterday.

While this has now lifted to 29x estimated FY 2019 earnings, I still feel this is great value for a company poised to profit greatly from the machine learning and artificial intelligence boom.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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