The recent performance of Appen Ltd (ASX: APX) shares would likely be a tough pill for investors to swallow. The S&P/ASX 200 Index (ASX: XJO) tech company and go-to AI stock has slumped some 60% from its August 2020 highs of $43.66 following multiple weak earnings reports and business headwinds.
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An Appen share price comeback?
Citi has made a bold call on Friday, rating the Appen share price as a buy with a $30.90 target price. This represents an upside of approximately 82% from its current level of $16.97.
The upside and valuation re-rate comes after the recent capital raising by Appen peer, Scale AI. Citi believes that this is an overall positive for Appen, showing solid growth in the AI training data industry.
What is Scale AI?
Founded in 2016, Scale AI is a private, San Fransisco-based company that "accelerates the development of AI applications by helping machine learning teams generate high-quality ground truth data".
To add a bit more context to exactly what Scale AI does, a self-driving car developer, for example, might have a significant amount of data collected from testing its autonomous vehicles.
Scale AI could play a role in labelling the collected data images. In simple terms, this involves labelling what objects are appearing so the autonomous car can then learn how to safely maneuver on the roads. If a data labeller was to consistently label cars as people, then the vehicle might get into very confusing situations.
The company has an impressive client list with notable customers such as PayPal, SAP, General Motors Co, Nvidia Corp and Lyft.
The recent US$325 million funding round for Scale AI now values the company at US$7.3 billion. Scale AI has said that it is currently on track to earn US$100 million in revenue within a 12 month period and that sales have doubled in the past year.
What does this mean for Appen?
Scale AI has a similar model to Appen in terms of its data labeling and training services. Arguably, the recent good news for Scale could be compared to Afterpay Ltd (ASX: APT) benefiting from a strong Zip Co Ltd (ASX: Z1P) quarterly result.
However, Citi has called out increasing competition in the space given the number of competitors raising money. The broker believes Appen may need to step up its research and development (R&D) investment in order to remain competitive and grow market share.
While Scale AI highlights its revenue doubling in the past year, Appen's revenue had only increased 12% for the full year ended 31 December 2020.
