Top broker says Appen (ASX:APX) might be a takeover target at this share price

Citi believes that Appen could be a takeover target at this lower price.

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The leading broker Citi believes that at the current Appen Ltd (ASX: APX) share price, it could be a potential takeover target.

Appen might be a takeover target

According to reporting by the Australian Financial Review, Citi thinks that the technology business could be a potential acquisition idea at the current share price of around $13.

The broker noted that an important issue to try to understand was whether Appen's decline was due to a structural issue (such as self-learning systems, in-sourcing etc), competition or another problem.

What's been going on?

Appen said a couple of months that there were a few reasons why 2020 didn't show as good growth as normal.

It pointed out that the Australian dollar strengthened in the second half of FY20, dampening revenue translated from US dollars into Australian dollars. The business also pointed out that COVID-19 has impacted the face to face selling motion (but this appears to be "in the past now" given the uptick in wins it saw in the fourth quarter of 2020).

Appen also said COVID-19 has interrupted many businesses and that in turn reduced their digital advertising spending for a period. This in turn impacted major customers' sources of revenue and although digital spending has bounced back "nicely", it's driving them to invest in new AI products that are less reliant on advertising.

Customers are also responding to data privacy and anti-trust concerns, as well as heightened competition amongst each other. Those issues are also driving new AI product developments, ones that rely less on personal data and make them more independent.

Citi's thoughts on the Appen share price

The broker has lowered its growth expectations for the business for the next five years.

However, due to the company's low price, Citi now believes that Appen looks attractive. The AFR quoted Citi analyst Siraj Ahmed:

Our discussions suggest demand for human annotated training data is not structurally impaired and that ongoing growth is expected, with evolving regulations and data privacy laws as key tailwinds medium-term.

However, our discussions also point to slower growth for data annotation as the major tech companies develop better systems.

With the recent increase in M&A and given Appen's position as a leader in the AI training data space as well as client exposure, we would not be surprised if Appen was a potential acquisition target for an IT Services or BPO firm.

We note Appen's main competitor Lionbridge was acquired by Telus International for 16x – 20x EV/EBITDA versus Appen currently trading at 13x.

Motley Fool contributor 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 and has recommended Appen Ltd. The Motley Fool Australia owns shares of and has recommended Appen Ltd. 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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