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Why the Appen share price is racing higher today

The Appen Ltd (ASX: APX) share price is outperforming other tech darlings this morning, and it isn’t all due to the risk-on mood of investors.

The APX share price jumped 3% to $22.51 when shares in the WAAAX cohort of ASX tech stars are lagging far behind.

The WiseTech Global Ltd (ASX: WTC) share price slipped 0.5% to $24.42, the Afterpay Ltd (ASX: APT) share price fell 1.4% to $28.48, the Altium Limited (ASX: ALU) gained 1.4% to $34.78 and the Xero Limited (ASX: XRO) share price inched up 0.3% to $79.12 at the time of writing.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.4% on reports that US President Donald Trump agreed to postpone tariffs on Chinese imports that were supposed to kick in this weekend.

Appen upgraded to buy

That may be fuelling animal spirits on our market but that’s not the only reason why Appen is outperforming. Bell Potter upgraded the stock to “buy” from “hold” after the stock’s recent lacklustre performance despite management upgrading its outlook for the third time.

“Appen has upgraded its 2019 guidance three times this year and yet the share price is now well off the peak of $32 in July this year and even below the c.$23 before the company last upgraded in November,” said the broker.

“This is puzzling in our view as the last upgrade implied that the core business of Appen and Leapforce is flying and the Figure Eight acquisition is performing better in 2H2019 after a disappointing initial contribution in 2Q2019.”

Profit beat ahead

What’s more, Bell Potter thinks Appen’s profit results in February will come in ahead of management’s guidance. This is because of management’s track record in under-promising and overdelivering.

The lower exchange rate will also help by adding between $1 million and $1.5 million to earnings before interest, tax, depreciation and amortisation (EBITDA), according to Bell Potter.

More growth for 2020 and 2021

“We forecast underlying EBITDA in 2019 of $100.7m which is slightly above the top end of the upgraded guidance range,” said the broker.

“We then continue to forecast strong underlying EBITDA growth in 2020 and 2021 of 19% and 21% which is driven by assumed continued strong growth in the core business (Appen and Leapforce) and reduced losses from Figure Eight in 2020 and then positive underlying EBITDA in 2021.”

Stocks to target in 2020

Bell Potter’s price target on the stock is $27.50, which implies a near 23% upside for the stock in 2020 if dividends are included.

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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of Altium, Appen Ltd, WiseTech Global, and Xero. 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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