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Is the Appen share price still in the buy zone? I think it is

Graphic image of a circuit board with an AI technology symbol

The Appen Ltd (ASX: APX) share price has been on form again on Tuesday and charged higher.

The shares of the global leader in the development of high-quality, human-annotated training data for machine learning and artificial intelligence (AI) have climbed 3% to hit a new record high of $36.90.

This latest gain means that Appen’s shares have now rocketed 135% higher since hitting a 52-week low of $15.70 in March.

Is it too late to buy Appen shares?

Based on the current Appen share price, I estimate that its shares are changing hands at approximately 43x FY 2021.

While this is certainly a premium to the market average and does mean they carry a lot of risk, I still see a lot of value in Appen’s shares for long-term focused investors.

Last year a company presentation advised that the AI market is expected to grow to be worth between US$169 billion and US$191 billion per annum by 2025.

This puts Appen in a particularly strong position for growth, because an estimated 10% of spending in this market goes towards data labelling. That means Appen’s addressable market could be worth US$17 billion to US$19 billion in five years.

This is materially more than the revenue of $536 million it generated in FY 2019.

And given the company’s leadership position in the market and its high quality customer base, I believe it is well-positioned to grow its market share strongly over the next decade.

Especially following the acquisition of Figure Eight. This business has a strong position in the government sector and looks well-placed to capture a slice of growing government spending on AI.

For example, Appen has previously noted that the US government has a US$5 billion AI budget and the UK government has a £2.3 billion AI budget.

Foolish Takeaway.

Although Appen’s shares are not cheap, I believe its extremely positive long-term outlook justifies the premium.

As a result, I think they would be great buy and hold options along with fellow tech shares Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO).

Where to invest $1,000 right now

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium and Xero. The Motley Fool Australia owns shares of Appen Ltd. 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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