Why the Appen share price has shot up 26% in the last month

With a stunning FY performance, investors have been scrambling to get a piece of Appen Ltd (ASX: APX). The Appen share price has returned an impressive 26% over the last month, and 136% over the last year.

Here’s why I think Appen should be on your watchlist.

What does Appen do?

Appen has built a crowdsourced labour pool of remote workers who create data sets on behalf of clients. This is then used as an input for training various machines with applications ranging from image recognition software to search tools. The company claims to have 1 million people who work for it from the comfort of their homes.

As more data improves the accuracy of machine algorithms, Appen benefits from repeat customers that need to update their data on a regular basis. This is required every quarter, and in a third of cases, monthly. For instance, Appen may be requested by a client to sort through 1 million photos of roads and tag all street signs presented in the images. This data set would be used to train algorithms that would be critical for navigating driverless vehicles.

Ultimately, businesses rely on Appen to train Artificial Intelligence/Machine Learning applications in their business, and this was key to unlocking Appen’s 119% growth in annual revenue.

2019 highlights

Appen has relied on highly manual processes to manage and support its remote workforce. This explains its strategic acquisition of San Francisco-based startup, Figure Eight, which utilises a superior software platform to manage workers. By shifting this labour pool of 1 million to Figure Eight’s software, this will bolster Appen’s productivity. Extending the previous example, Figure Eight’s software is capable of annotating dash-cam footage 50x faster than humans.

The two companies share many similarities, both leveraging a crowdsourced, digital workforce to categorise, label and annotate data for customers. Yet, Appen and Figure Eight’s customer base has little overlap, furthering the synergetic relationship.

Foolish takeaway

Appen’s recent FY earnings results blew the hats off investors. Its EBITDA grew $71.3 million, rising 153% since 2017. As a result, EPS has also grown $0.18 since mid-January to $0.38, bringing the market cap to $2.381 billion.

The company trades on a 58x P/E ratio, which is miles above Australia’s share market average at 14.7x. However, this is modest in comparison to its peers. WiseTech Global Ltd (ASX: WTC) for example, has a staggering 129x multiple. Also, Appen is not constrained by its debt levels and has been consistently growing its EPS at 42% annually for the last 5 years.

I’ll be keeping an eye on Appen shares, particularly with its transformative productivity boosts that will come about from its recent acquisition.

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Motley Fool contributor Audrey Thehamihardja has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd and WiseTech Global. 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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