Appen Ltd (ASX: APX) shares have been major outperformers in 2024 and are up more than 211% since January.
The ASX tech stock has surged more than 106% in the past month alone, as global sentiment around artificial intelligence (AI) continues to drive investment into AI companies.
Appen has been a dominant player in the AI data training space for some time now. But it faces growing competition from a 27-year-old billionaire and his rapidly expanding AI company, Scale AI.
Could this be the biggest threat to Appen's future growth? Let's dive in and see.
Appen shares rally by triple-digits
Appen shares have exploded from lows of 43 cents apiece at the end of July and now trade more than 4 times higher at $1.96.
Investors have been betting on the company amid the broader AI boom. The catalyst? Initially, it was Appen's quarterly numbers on July 30.
The company highlighted its US$600,000 profit for the quarter, up from a heavy loss in the prior corresponding period.
CEO Ryan Kolln attributed the turnaround to Appen's growing importance in the generative AI market, where it provides data to leading AI model builders.
And despite a revenue loss due to the termination of its contract with Alphabet Inc Class A (NASDAQ: GOOGL), investors have been "quick to forgive the revenue slide" as my colleague Bernd noted.
As such, investors continue to bid up Appen shares, with the stock up around 8% in the past week.
Scale AI: Appen's emerging competitor
However, the sustained growth in Appen shares could face fresh rivalry from a fast-growing competitor.
Scale AI, founded by 27-year-old AI billionaire Alexandr Wang, has started to make some inroads in the AI data annotation and training market.
The new kid on the block provides labelled data for AI model training, using machine learning to cater to specific industries.
Meanwhile, Appen uses a combination of automation and 'human-in-the-loop' tools in its operations – a point it sees as an advantage.
In 2023, Scale AI's revenue grew by 162% year over year, reaching US$760 million.
In comparison, Appen produced sales of $399 million last year. This was down from $570 million the year prior, and more than $600 million in 2021.
Scale AI's growth trajectory has been fuelled by its close ties with companies like OpenAI, Anthropic, and Cohere, which use Scale AI to train large language models (LLMs).
Scale AI's ability to handle massive datasets and complex AI projects quickly is becoming increasingly attractive to tech giants seeking faster, more scalable solutions.
Compared to Appen, its AI and machine learning technology can "significantly reduce project turnaround times."
This could challenge Appen's business model, which relies heavily on its global workforce for data annotation and training rather than machine learning alone.
Still, Appen boasts a platform of more than 1 million freelance workers across more than 170 countries. Time will tell which side wins the race and what impact the competition will have on Appen shares.
Foolish takeaway
Appen shares may have enjoyed a dramatic rebound in 2024. But in classic tech fashion, the company faces disruption from players like Scale AI.
In the last 12 months, Appen has climbed 92.4%.
