Shares in ASX technology company Appen Ltd (ASX: APX) have rallied recently after the company restated its FY20 earnings guidance in the face of the coronavirus pandemic.
In fact, Appen shares have performed so strongly over the last few weeks that they are already almost back to their pre-coronavirus prices. In mid-February, before the ASX started tanking, Appen shares were changing hands at a little over $27 a pop. As at the time of writing, they are back up to $25.35, more than 60% higher than the 52-week low of $15.70 they hit on 13 March.
Of all the popular 'WAAAX' shares – WiseTech Global Ltd (ASX: WTC), Afterpay Ltd (ASX: APT), Altium Limited (ASX: ALU), Appen and Xero Limited (ASX: XRO) – Appen is the one whose share price is closest to its pre-crisis levels.
The other companies have also seen strong rebounds in their share prices – at the time of writing, Afterpay is up a whopping 260% from the 52-week low of just $8.01 it reached in late March. And while this might be great news for short-term investors, it's not much consolation to longer-term shareholders who are still suffering significant losses so far in 2020.
What makes Appen so resilient?
In a COVID-19 update released to the market on 15 April, the company stated that it still expects full-year underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be between $125 million and $130 million. This would mean growth of at least 24% over prior year EBITDA.
And while this is a big driver for the share price recovery, it doesn't make Appen unique amongst the WAAAX shares. WiseTech also recently reaffirmed its FY20 EBITDA guidance of between $114 million and $132 million, an uplift of between 5% and 22% over FY19. And while the WiseTech share price has also risen sharply from its mid-March lows, it is still well off pre-COVID prices.
Instead, the relative performance of the different WAAAX shares could be indicative of which companies investors think will have the best chance of success in a post-pandemic economy.
In its April business update, buy now, pay later fintech Afterpay claimed to have been mostly immune from the impacts of the coronavirus. But investors clearly don't think it has the same revenue-generating capability now as it did prior to the crisis. Afterpay's business model depends on strong consumer sentiment and high rates of discretionary spending, both of which may soon start to dry up.
Logistics software developer WiseTech relies on international trade for its revenues. But with most international borders closed and supply chains disrupted, many economies may start concentrating on bringing more industries home, reducing the number of goods they import and export.
The Xero share price has held up well as its cloud accounting software will still be required by small businesses over the upcoming tax season, thanks mainly to the Federal Government's JobKeeper stimulus package. But with the economic outlook becoming increasingly gloomy, its population of small business clients may start to diminish.
Altium's design software helps its customers build printed circuit boards, an essential part of just about every electronic device. However, even it has felt the impacts of the pandemic, and in early April advised the market that it was withdrawing its earnings guidance for FY20.
Out of all these companies, Appen has less of a dependency on face-to-face business, physical supply chains, or strong consumer sentiment. It specialises in artificial intelligence and machine learning and helps companies in a diverse range of industries speed up and automate processes. It has stated that it has seen an uptick in business activity recently due to more people using social media and e-commerce platforms during the pandemic.
Should you invest?
I believe Appen is well suited to a post-pandemic world. It is focussed on simplifying and automating processes for businesses, and as more companies are forced to downsize and operate remotely, it could find that demand for its services increase.
Considering its recent gains, it might be worth waiting for another pullback in the Appen share price in order to get the best value for your money. However, I think Appen is one company that could emerge from this crisis in an even stronger position than before the pandemic.
