The Appen Ltd (ASX: APX) share price is going from zero to hero as it surges higher on Friday after UBS upgraded its recommendation on the stock following its big crash yesterday.
The Appen share price jumped 4.9% to $25.45 in lunch time trade after copping an 11% plus belting the day before as investors got spooked by its half-year profit result.
There’s a lot of expectation built into its share price of the machine learning and artificial intelligence applications developer as the stock had stormed over 60% higher in the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index improved by a modest 3% plus.
What’s eating Appen
The lack of an upgraded FY19 earnings guidance may have left some feeling let down but the key reason for Thursday’s sell-off can be pinned on its Figure Eight business, which the Appen acquired for $300 million early this year.
But Appen’s golden run isn’t over and the pullback should be viewed as a buying opportunity, according to UBS, which lifted its recommendation on the stock to “buy” from “neutral”.
“We acknowledge downgraded Figure Eight ARR [annual recurring revenue] expectations this close to acquisition requires investigation, but we believe the market has overlooked the implied growth outlook of the core Relevance business,” said the broker.
“On a LFL [like-for-like] and constant currency basis, we believe that business is expected to deliver ~18% hoh [half-on-hlaf] EBITDA growth, implying end market dynamics are strong.”
Is the stock oversold?
UBS thinks investors are making a mountain out of a molehill even though management has overestimated Figure Eight’s FY19 ARR growth at 40% to 50%. But the disruption from the acquisition and a shift in customer focus resulted in weaker second quarter renewals and sales.
“We continue to see the upside opportunity from Figure Eight and continued AI requirements remain a major tailwind, especially in Government, where Figure Eight has worked previously,” added UBS.
“We expect accelerated growth as APX utilises its crowd to drive larger project size (46% FY20-23 revenue CAGR).”
The upside to Appen’s share price
The broker has also upgraded its price target on the stock to $30 from $26.20 a share, which implies an 18% upside for the stock.
Appen is regarded as a market darling and its part of the well-loved WAAAX cohort. The group gets its name from the first initial of its members, who are WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU), Appen and Xero Limited (ASX: XRO).
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Brendon Lau owns shares of AFTERPAY T FPO. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO, 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.