The Appen Ltd (ASX: APX) share price is again trading close to its 52-week/all-time high of $31.04, but this is a stock that seems to be doing this an awful lot. Appen shares have dipped slightly today, however, and are currently trading for $30.17 at the time of writing.
Appen has been an outstanding ASX performer in 2019 so far, with year-to-date (YTD) price gains of more than 130%. It sounds like a textbook winner on paper… but I'm holding off. Here's why.
What does Appen do?
Putting one of the 'A's in WAAAX, Appen is one of the ASX's most loved tech-darlings. The company specialises in providing human-annotated datasets used for machine learning and artificial intelligence (AI). In simpler words, they provide data on human behaviour in a form that computers can understand and 'learn' from.
This is a highly valuable commodity in our modern world, with many of the biggest names in the tech world (think Apple, Amazon and Facebook) heavily investing in AI and machine learning. Take Apple's virtual assistant Siri (whom I'm sure most of you would be familiar with). For Siri to 'learn' to understand us better, Apple feeds it the kind of information Appen provides.
Why have Appen shares surged?
Appen benefits from both the prestige of being a high-flying tech stock and the beautiful numbers it has been putting up. This lethal combination has driven Appen's shares into the stratosphere over the last few years. It's hard to argue with Appen's numbers either.
For the 2018 year, the company posted increased revenue of 120% over 2017 levels, and underlying earnings increased by more than 150%. Appen doesn't disclose who its clients may be at any one time, but it's likely that a stream of Silicon Valley tech giants are consistently engaging the company. Long story short, its not too hard to see why Appen has been driving ASX investors wild.
Why am I holding out? A Foolish takeaway
There are two reasons I am waiting to buy Appen shares. First, the current share price has been bid to near-ridiculous levels (in my opinion) and offers very little non-speculative upside at this height. Appen shares are trading with a price-to-earnings (P/E) ratio of 76.67. To put this in perspective, companies like Alphabet and Apple (which Appen has likely worked for ) both have P/E ratios of 26 and 17, respectively. Appen would have to post triple-digit revenue growth for at least a few years to justify this price level, and that is a big ask.
Second, although Appen's product is highly valuable now, with the pace of machine learning it's unclear how much longer computers will need this data before they can learn on their own. This would render Appen's datasets redundant very quickly. This is a risk for the stock and another reason why I'm staying away from Appen – at least for the time being.
