Is the Appen (ASX:APX) share price a cheap buy?

Could the Appen Ltd (ASX:APX) share price be a really cheap buy now? It has actually fallen by 55% over the last six months.

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Is the Appen Ltd (ASX:APX) share price a cheap buying opportunity?

Its shares have dropped 55% over the last six months and it’s actually down by 62% since the high in August 2020.

Sometimes an ASX share can look good value after falling so hard, whereas other times it’s still not cheap. Even after a huge decline, a business can still fall a long way.

What happened to the Appen share price?

The ASX tech share, which provides datasets for machine learning and artificial intelligence, reported its FY20 result a few weeks ago for the year to 31 December 2020.

Appen said that revenue went up by 12% to $599.9 million. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose 8% to $108.6 million, whilst statutory EBITDA grew 23%.

Whilst statutory net profit after tax grew 23% to $50.5 million, underlying net profit after tax only rose 1% to $64.4 million. That growth wasn’t as much as investors were expecting that it would be during the year, hence why the Appen share price fell as it updated investors about its expectations throughout the year.

There were some positives that Appen highlighted. It said its customer base is growing with 136 new customer wins in 2020, whilst there was a 34% increase in the number of projects with its top five customers. Appen also said that China revenue was growing by 60% quarter on quarter.

Appen’s two divisions reported mixed results. Relevance revenue increased by 15% to $538.2 million, whilst speech and image revenue dropped by 10% to $61.2 million.

How did Appen explain the challenges?

Management explained that its sales process was impacted by the pandemic-driven shift to working from home, resulting in fewer customer wins in the second quarter and third quarter, before bouncing back in the fourth quarter.  

Appen also said that the pandemic reduced online advertising in the mid-2020s, impacting major customers and resulting in less spending on advertising-related AI programs as resources were re-prioritised to new products and some projects were deferred.

The company said it’s involved in many of these new projects, which are in their early stages and growing, and will complement its major programs. A majority of deferred projects are recommencing in 2021.

Outlook for FY21

Appen said that at February 2021, its year to date revenue plus orders in hand for delivery in FY21 was approximately $240 million.

It’s expecting FY21 underlying EBITDA to be in the range of $120 million to $130 million at constant currency rates, representing growth of 18% to 28%.

Broker ratings on the Appen share price

There are very different opinions about the Appen share price.

Ord Minnett rates Appen shares as a buy, with a price target of $24.75 – that suggests upside of around 50% over the next year. The broker thinks that Appen’s long-term growth can continue and its valuation isn’t expensive.

Using Ord Minnett’s numbers, the Appen share price is valued at 29x FY21’s estimated earnings and 22x FY22’s estimated earnings.

Macquarie Group Ltd (ASX: MQG) has put a price target on Appen of $16 and the broker believes that there’s going to be more competition for Appen as time goes on, hurting margins.

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Tristan Harrison 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. The Motley Fool Australia has no position in any of the stocks mentioned. 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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