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The stock turning artificial intelligence into cash

artificial intelligence boom ai

Key statistics: ASX: APX
Closing share price 15.05.18: $9.880
52-week high: $11.130
52-week low: $2.570
Most recent dividend: 3c
Annual dividend yield: 0.57%
Franking: 100%

A year ago I wrote an article that began with the statement “Artificial intelligence is the latest hot topic sweeping across the tech scene”.

The article went on to talk about Appen (ASX: APX) a listed technology company that develops high quality datasets for machine learning and artificial intelligence.

A year later artificial intelligence dominates the conversation in tech circles.

While there is an element of hype to it, there is also a lot of substance. Driverless taxis are now making the rounds in Phoenix, Arizona, Netflix knows what movies you want to watch, and the tech giants Google, Apple and Amazon are battling it out in the voice-activated smart speaker market.

So how has Appen fared through all this?

When opportunity arrives those who benefit most are those who have positioned themselves to capitalise on it. Appen has spent 21 years preparing for this opportunity and in 2017 it certainly capitalised.

At the time of my previous article it was trading at $2.66. In 2017 revenue grew by 50%, underlying net profit after tax increased by 86% and the share price is now hovering near $11.00.

During 2017 Appen purchased US competitor Leapforce. This makes it the global leader in its field. It undertook a capital raising at the time to partially fund the acquisition which included a $5 million share purchase plan.

The share purchase plan was oversubscribed 11 times.

Leapforce earned 2017 revenue of about $77 million and profit of $9.6 million with only 21 staff. It has a very efficient, highly automated process which results in high margins. The acquisition gives Appen considerably more scale as well as diversifying its revenue base.

Last year Appen’s revenue grew to $167 million. Forecasts could see it as high as $300 million next year with the inclusion of Leapforce as well as organic growth.

With EBITDA margins of 17% this revenue is translating into solid profits as well as cash flow. Net profit after tax is forecast at $34 million this year up from underlying profit of $19.7 million in 2017.

The biggest risk with these forecasts is that Appen’s revenue base is highly concentrated. The majority of its revenue comes from five customers which includes Microsoft and Facebook. Leapforce added a sixth major customer to the mix. The loss of a key customer would have a material impact.

To put Appen’s business performance in perspective, compare it with popular fintech stock Afterpay Touch (ASX: APT). Afterpay produced a loss of $19 million last year on $23 million of revenue.

It is forecast to increase revenue to $119 million and make a small profit this year. Its market capitalisation is $1.5 billion compared with Appen’s market capitalisation of $1.2 billion.

Another tech stock, Pushpay has a market capitalisation of $1.1 billion despite forecasting revenue of only $70 million and a projected loss of $20 million.

Appen will have to deliver continued strong growth and profits to justify trading on a forecast PE ratio of 33 times, but as illustrated by the examples above, there are certainly other stocks with more frothy valuations.

Appen has the track record to show it knows how to turn tech into cash. At recent prices it no longer represents a value opportunity, but it also has not necessarily exhausted its growth opportunities.

When linguist Dr Julie Von Willer founded the business in 1996 artificial intelligence was still in the realm of science fiction, but now its time in the sun has come, and Appen is right in the middle of the mix.

The author’s related parties have holdings in APX

Written by Chris Batchelor

Chris Batchelor

Chris Batchelor CFA is executive manager of SMSF Direct at
SuperConcepts.

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