Shares in ASX technology company Appen Ltd (ASX: APX) have continued to tumble this month. Since the beginning of May, Appen shares have shed almost 30% of their value, dropping to just $11 by the close of trade on Friday.
This means they are now down more than 50% this year and are a whopping 75% short of the 52-week high price of $43.66 they reached in August of 2020. They even recently fell to $10.65, their lowest price in more than two years.
That's a pretty stunning fall from grace for a former ASX darling and member of the much-vaunted WAAAX group of companies – along with WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU), Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).
Let's take a look at what might have caused the big drop in the Appen share price.
Image source: Getty Images
Company background
Appen specialises in machine learning and artificial intelligence (AI). The company collects large amounts of data which it then provides to its clients to assist in 'training' their AI applications. For example, Appen might provide visual data to a company developing self-driving vehicles in order to assist the AI to recognise crucial objects like traffic lights, other cars and pedestrians.
Appen already has an impressive list of clients that it has partnered with over the years, including international tech giants like Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc. (NASDAQ: AMZN).
What sparked the Appen share price decline?
This time last year, things were looking great for the Appen share price. It had shrugged off the March COVID market sell-off and was on its way to an all-time high of $43.66. However, things took a turn for the worse in August and haven't improved since.
The initial sell-off came around the time Appen released its results for the half-year ended 30 June 2020. Although Appen reported revenue growth of 25% versus the prior comparative period, and a 44% uplift in statutory earnings before interest, tax, depreciation and amortisation expenses (EBITDA), shareholders were clearly unimpressed. It probably didn't help that the company merely maintained – rather than increased – its full-year outlook. In the week following the release of the results, Appen shares dropped over 20% lower.
Then, in December, Appen was forced to issue a guidance downgrade. Due to a sluggish fourth quarter, Appen revealed that underlying EBITDA for the year ended 31 December 2020 was now expected to fall in the range of $106 million to $109 million. This was a pretty significant drop from the original guidance of between $125 million and $130 million, which had been reaffirmed in the company's half-year report.
The company finally released its full-year results in February. Underlying EBITDA at least came in towards the top of the revised target, at $108.6 million. Revenues increased by 12% during the year (to $599.9 million), with rapid growth particularly coming from the Chinese market, where revenues increased by 60% quarter-on-quarter.
Appen stated that it expected underlying EBITDA growth of between 18% and 28% during 2021, to around $120 million to $130 million. Even if Appen was to reach that target, it would be hitting those annual earnings levels a year later than it had originally forecast, demonstrating how much of an impact COVID-19-related business headwinds had on its earnings.
