Why JPM just upgraded the beaten-down Appex (ASX:APX) share price to “buy”

The Appen Ltd (ASX: APX) share price continues to tumble after its disappointing outlook but the stock just got upgraded to “buy”.

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The Appen Ltd (ASX: APX) share price continues to tumble after its disappointing outlook but this is a good time to buy the stock, according to JPMorgan.

The broker upgraded its recommendation on the APX share price to “overweight” from “neutral” despite the bad news.

Appen share price falls despite broker upgrade

The move is yet to help shares in the artificial intelligence (AI) company though. The Appen share price lost another 2.4% to $25.58 in the last hour of trade when peers like the Afterpay Ltd (ASX: APT) share price and Xero Limited (ASX: XRO) share price are outperforming.

Today’s loss comes on top of Appen’s 12.4% plunge yesterday when it downgraded its earnings guidance.

Appen share price rocked by earnings downgrade

Management warned that FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) would range between $106 million to $109 million. This compares to its earlier forecast of $125 million to $130 million.

Reprioritisations of projects by its key customers and the falling US dollar are largely to blame for the downgrade.

“Slowing momentum over Q3 and Q4 was driven by APX’s major clients reprioritizing resources towards new product areas, which has impacted volumes in APX’s large mature relevance projects,” said JPMorgan.

“Although some of this spend has likely been deferred into FY21, there remains an element of uncertainty over the next couple of months as work programs and purchasing decisions are made by APX’s major clients.”

Sales pipeline has a silver lining

Despite the setback, Appen reported a 32% increase in the number of projects from its customers. This bodes well for its pipeline of future projects even though these new projects are still in the very early stages.

“Although these projects are still in their infancy, we see APX’s ability to increase the breadth of its exposure as a testament to APX’s market leading AI data annotation credentials,” added JPMorgan.

“Management expects to provide more clarity on the order book into 2021 at the full-year result in February.”

Why JPM upgraded the stock to buy today

But the broker doesn’t think investors should wait till next year to buy the stock. JPMorgan is feeling confident in the Appen share price as the company is well placed to benefit from the growth in global AI investment.

JPMorgan’s 12-month price target is $30 a share. This leaves a more than 17% upside to fair value.

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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 Appen Ltd and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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