The Appen Ltd (ASX: APX) share price has surged since dipping 28% in October.
The WAAAX shares are a group of technology-based, ASX listed growth companies. The acronym is made up of Wisetech Global Ltd (ASX: WTC), Appen, Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO). They are commonly referred to as the Australian equivalent to the better known American FAANG stocks. As with the FAANG companies, these stocks were hammered towards the end of 2018, due to their high valuations and uncertain macro factors causing greater volatility in the market.
Can Appen beat the ASX 200 going forward?
Appen describes its services as the "development of high-quality, human-annotated datasets for machine learning and artificial intelligence (AI)". The company currently uses over 1 million contractors to produce language technology data. In a recent Australian Financial Review article, the company's CEO Mark Brayan indicated the desire to become more of a tech company. Using machines alongside humans will bring efficiency to the current process and should help to boost margins.
In its 15th November earnings update, Appen reported an increase in the company's 31 December 2018 full year underlying EBITDA estimate. The company increased the bottom range of guidance by 14.8%, to $62 million and the top end of guidance 10.2%, to $65 million. The company noted that there may be upside or downside movements based on exchange rates and the timing of work. We will get a chance to see the company's final 2018 numbers on the 25th of February when Appen releases its full-year results.
Appen currently trades at 27x the midpoint of its November EBITDA revision. This is above the market average of 16/17x earnings, however, this isn't unexpected given the company's growth prospects. As a bonus, the company also has a small dividend, yielding 0.5% plus franking credits.
The Appen share price is currently trading at $15.80, up 1.74% for the session.
Foolish takeaway
Whether Appen exceeds or underperforms the market's expectations on February 25th isn't my concern. The company proving that it continues to grow at an astonishing rate is more important. With customers in the growing machine learning and AI industries, I believe that the Appen share price should continue to do well over the long term. My only hesitation on buying shares is ensuring that they are acquired at a fair price.
