Appen (ASX:APX) share price: Is the disruptor becoming the disrupted?

Is Appen Ltd (ASX: APX) at risk of disruption? Yesterday’s share price collapse points towards some concerns for the former tech darling.

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Appen Ltd (ASX: APX) shares have been unloved over the last 9 months, and yesterday was no exception. Following the release of presentation materials for the Macquarie Australia Conference, shares in the artificial intelligence (AI) dataset annotation company hurled themselves downwards.

By the end of the session, the Appen share price had fallen 21.1% to $11.63. So, what is all the commotion triggering Appen to collapse to a multi-year low?

What’s ‘Appening’ to the former ASX tech darling?

Data annotation getting smarter

A concern that has been floating around the company for some time is disruption. This is odd, considering Appen is a tech company operating in the AI space.

While Appen does have its own technology that increases the efficiency of data labelling, it relies on a 1 million-strong crowd of contractors. These people manually annotate the training data sold to Appen’s clients. When you think about it, this sounds somewhat manually intensive for a tech company.

Appen has dismissed concerns of its manual annotation becoming outdated over the years. But with growth flatlining, has the disruption already begun?

One space that Appen provides its services to is the evolving autonomous driving industry. Training data is used to improve the AI required to navigate vehicles with minimal human intervention.

However, Tesla Inc (NASDAQ: TSLA) has been working on its “Dojo” supercomputer for streamlining this process. Still in development, Dojo will be optimised to train neural nets, and Elon Musk has stated they will make the technology available to other companies.

Dojo, if pulled off, could have the potential to substantially exceed the speed and accuracy of current tech-assisted human annotation. That kind of disruption is one possible reason investors are appearing less enthusiastic about Appen’s future potential.

Too many eggs in one basket

Another aspect that poses a risk for Appen is its customer concentration. It has long been rumoured that a substantial portion of revenue is derived from Google and Microsoft. Whilst this hasn’t been formally acknowledged by Appen, broadening its customer base is a focus for the company.

Both Google and Microsoft are tech titans themselves. While these companies have a major data thirst now, there’s no telling when that might disappear. If either of them was to innovate beyond the need for manually annotated data, that would be a heavy blow to Appen’s revenue.

Having said that, much of this is anecdotal – operating in a theorised future of ‘what ifs’ and ‘could bes’ – but as the business’ growth slows, these are likely the front-of-mind concerns for many investors. And given the 60% decline in the Appen share price over the past year, the edginess is unsurprising.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Mitchell Lawler owns shares of Appen Ltd, Macquarie Group Limited, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, and Tesla. 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 Australia has recommended Alphabet (A shares) and Alphabet (C shares). 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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