The Appen Ltd (ASX: APX) share price may have surged ahead of the market over the past year, but there’s still room for the stock to advance, at least that’s according to one broker.
The machine learning and artificial intelligence company raced ahead by 74% in the last 12 months compared to a 21% jump in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Top pick among WAAAX
Don’t be worried about the stock looking overstretched. Bell Potter rates the stock as its top choice in the tech sector over other high-flyers that make up the WAAAX cohort.
The name is made up of the first letter of high-flying tech stocks. These include WiseTech Global Ltd (ASX: WTC), Afterpay Ltd (ASX: APT), Appen, Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO).
Bell Potter spells out five reasons why the Appen share price can move higher this year.
The first will become apparent next month when the reporting season kicks off. Bell Potter believes management will deliver a result that shows that the 2019 financial year was a very good one for the company.
Secondly, Appen is tipped to unveil 2020 guidance that supports consensus expectations of a 30% increase in its earnings before interest, tax, depreciation and amortisation (EBITDA).
Figure Eight to deliver a “10”
The company’s weak link, being the Figure Eight business is also tipped to deliver a turnaround performance, according to Bell Potter.
“Figure Eight had a disappointing start in 2Q2019 but we expect improvement in 2H2019 and further improvement in 2020,” said the broker.
China and cash
The fourth reason to buy the stock is China. That market currently contributes less than 5% of group revenue, but Bell Potter believes China will be a much bigger growth driver for Appen in 2020 and beyond.
Lastly, Appen holds more than enough cash to fund growth. This is despite the fact that management is forecast to pay an earn-out of between $35 million and $60 million relating to the acquisition of Figure Eight.
The payment is due in the first half of this calendar year but Bell Potter estimates that Appen will still have a strong cash position after the payment.
Top tech performer
Bell Potter reiterated its “buy” recommendation on Appen with a 12-month price target of $28.75 a share.
In cast you are wondering, the Appen share price isn’t the best performing WAAAX stock over the past year. That crown goes to Afterpay with its 133% share price jump.
Xero is next on the leader board with a 103% increase followed by Appen.
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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.