Why the Appen (ASX:APX) share price is down 6% to a multi-year low

The Appen Ltd (ASX:APX) share price is sinking on Thursday following the release of a presentation. Here’s what you need to know…

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The Appen Ltd (ASX: APX) share price is sinking lower on Thursday morning.

In morning trade, the artificial intelligence (AI) data services company’s shares are down 6% to a multi-year low of $13.82.

Why is the Appen share price sinking?

Investors have been selling the company’s shares this morning following the release of a presentation ahead of its appearance at the Macquarie Group Ltd (ASX: MQG) conference.

While that presentation didn’t include any new financial data, the company’s CEO, Mark Brayan, provided a lot of colour of industry conditions.

Mr Brayan started by explaining why market conditions have been choppy during COVID-19, which has impacted demand, its growth, and ultimately the Appen share price.

He said: “Clearly, ours is a dynamic market. Our customers, large and small, are responding to market forces, including those above [data privacy and anti-trust concerns], and developing AI products at speed, to better their competitors.”

“Coupled with this is the fact that AI product development is experimental. The performance of the underlying model is unknown until it’s built and tested in the real world. This results in an iterative process in which models are built, tested, tuned, re-tested and so on. Training data is an essential component of machine learning and is tied to our customers’ product development lifecycles. As such, training data volume requirements are not always linear.”

“This is the primary reason behind the recent choppiness in our growth. Our major customers are reprioritising their product development projects as they iterate and build new products in response to dynamic market forces. This has resulted in changing data volumes on a handful of large projects and this impacted our revenue,” Mr Brayan explained.

Current trading conditions

Positively, he advised that there’s been no change in the need for training data. More companies are investing in AI and they all need training data.

Mr Brayan notes that the high growth in the number of customers it is winning, including in China, is a testament to this.

The CEO also revealed that the competitive environment for relevance data is unchanged, with Appen and Lionbridge AI remaining the key providers. Relevance represents ~90% of its revenue, so this is a big positive.

Pleasingly, the company is not seeing any unusual pressure on pricing. Mr Brayan advised that its “customers want a good deal and they negotiate well, but they will pay for quality and reliability and our reputation is strong in these areas.”

What else did Appen say?

While the above was positive, there were a few items that appear to be the reason why the Appen share price is falling today.

Mr Brayan explained: “Our customers are developing new AI products in response to COVID’s impact on online advertising last year and regulatory pressures such as anti-trust and data privacy. This dictates the data they need for product development and impacts their engineering resource allocations and the volumes and types of data they need from us.”

“As stated before, machine learning is an iterative process, and our customers are switching resources between development projects as they pursue new break-out products. This in turn has impacted a handful of our larger programs.”

“Our competitors outside of relevance are maturing. This is unsurprising. Their presence and funding demonstrate that ours is an attractive market. We maintain our leadership position and our customers rely on us for quality, scale, security and reliability but it means that we have to maintain our flow of new product features and fight harder to stay ahead,” he added.

The company is aiming to offset this by looking beyond data collection and labelling for additional growth paths in the broader AI market. Management expects that these will be technical in nature and build on its products, customer base, and market position.

The Appen share price is now down 46% year to date.

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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 Appen Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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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