The Appen Ltd (ASX: APX) share price rallied even after a leading broker cut its recommendation on its shares.
The artificial intelligence (AI) software developer jumped 5% to $6.97 this morning – making it the top performer on the S&P/ASX 200 Index (ASX: XJO).
And in case you are wondering, the Iluka Resources Limited (ASX: ILU) share price and Paladin Energy Ltd (ASX: PDN) share price are in second and third spot.
Appen share price bucks downgrade news
But the surge in the Appen share price could puzzle some as it comes after JPMorgan lowered its rating on the shares to "neutral" from "overweight".
The broker made the downgrade following Appen's disappointing results, which missed JPMorgan's estimates.
The weakness was driven largely by Appen's New Markets division. This business failed to live up to growth expectations.
Lofty targets and near-term uncertainty
Investors would have also been put off by management's decision not to issue any more short-term guidance. If there's one thing that markets hate, it's uncertainty.
Management will instead focus on its 2026 targets and that means an increase in reinvestment in the business, noted JPMorgan.
"We believe APX's 2026 target to double revenue seems very ambitious given mgmt's recent track record," said the broker.
"Although the stock has likely oversold in the short term, the lack of visibility on growth and heightened levels of reinvestment means we would prefer to stay on the sidelines until mgmt starts delivering on their guidance."
Looking past US for support
Appen is counting on growth in non-global customers to contribute meaningfully to its 2026 targets. The number of such customers, which are essentially non-US tech giants, is tipped to grow at a 35% compound annual growth rate (CAGR).
That means this group will be contributing to around a third of Appen's revenue.
"The guidance also implies mid-single digit growth in APX's Global Services revenues," added JPMorgan.
"At this point in time we believe these targets appear to be very ambitious, given revenue growth has slowed from 11% in FY20 to 8% in FY21."
What is the Appen share price worth?
JPMorgan cut its 12-month price target on the Appen share price to $7 from $13.50 a share.
But given the 59% collapse in the Appen share price over the past year, some shareholders might just be relieved that the downgrade wasn't more severe.
