As a growth investor there are certain companies that I always keep on my watchlist. This tech company has been outperforming the ASX200 by far in the year to date. Recently, its share price has been experiencing extra volatility in the market. This could open an opportunity to buy into its growth.
Here is my top April pick: Appen Ltd (ASX: APX). Its stock price has risen 83.8% YTD for a $23.52 close yesterday.
Why Appen?
Appen is a tech company that has attracted huge attention in the last few years. It is part of Australia's hottest tech stocks, the WAAAX, which is our version of US' FAANG. It's not hard to see why. Investors have been rewarded lavishly from putting their dollars towards this company.
Appen has built a crowdsourced labour pool or remote workers who create data sets for clients. This is used as input for training machines with applications ranging from image recognition software to search tools. The company claims to have 1 million people who work for them from the comfort of their homes.
What makes this proposition defensible is that customers need to come back. As data improves the accuracy of machine algorithms, clients need to update their data on a regular basis on either a quarterly or monthly basis. Businesses rely on Appen to train AI/ML applications, and this was key to unlocking its 119% growth in annual revenue in the first half of the year.
Foolish Takeaway
In its HY earnings call, Appen's EBITDA grew by $71.3 million. This figure has risen by 153% since 2017. Analysts are bullish on company performance with 2-year forward EPS forecast to grow 40.4%.
A key underlying metric growth investors should be taking note of is debt.
Appen is a highly levered company with a debt-to-equity ratio of 0.61. Can it afford its debt? A company should generally have earnings before income and tax 3x the size of its interest payments. Appen has a 21.91x ratio, which completely disregards any investor concerns around leverage.
Appen also has a high return-on-equity of 19% which exceeds the IT industry average of 14%. A higher ROE signifies a more profitable company, as it is efficiently able to generate profit from shareholder investments.
With otherwise strong underlying business metrics, its PE ratio of 58x is admittedly high. However, I'm willing to take the risk to buy Appen long term given its efficient management.
