How to invest in the artificial intelligence boom

Key statistics: ASX: APX

Closing share price 02.05.17: $2.660

52-week high: $3.620 52-week low: $1.8.00 Most recent dividend: 3c Annual dividend yield: 1.88% Franking: 100%

Artificial intelligence is the latest hot topic sweeping across the tech scene.

But for Artificial Intelligence to work it has to be powered by vast amounts of data which is crunched through powerful computers that mimic the processing techniques of the brain.

Without data the AI processors do not have the inputs they need to 'learn'. Appen, listed on the ASX since January 2015, has been developing datasets to train these machine learning algorithms for the past 21 years.

Appen is effectively providing the picks and shovels for the AI rush. And a rush it is. Worldwide revenues from cognitive systems and artificial intelligence is forecast to grow from $8b in 2016 to $47b in 2020.

Last year Appen's revenue grew by 34% to $111 million. Its revenue is grouped according to two primary areas of business, content relevance and language resources. About two thirds of its revenue comes from content relevance and it grew by 44% last year.

This involves using data to improve search results for web, social media and ecommerce businesses.

The other third of revenue comes from language resources. Speech recognition is a rapidly growing area of computing as companies try to develop more natural interfaces.

An example of a project it worked on was with Microsoft to develop Skype translator.

Skype translator allows speakers of two different languages to speak to each other in real time over the skype network each speaking and hearing in their own language.

Appen also works with automotive companies on their speech recognition technology and recently opened an office in Detroit.

While it is operating in a niche area, Appen is not playing at the small end of town.

Eight of the top 10 global technology companies are its customers including five of the top six of all companies. It tends to form partnerships with its customers which results in ongoing business over multiple years.

Importantly, as well as strongly growing revenue, profits have also been growing with an increase in Net Profit After Tax in 2016 of 26% despite some margin pressure as large customers demand volume discounts.

These profits are translating into cash with Appen generating cash flow well in excess of its requirements. The balance sheet is also strong with no debt and a surplus of cash.

The stock is relatively expensive with a forward PE ratio of 21, but with a return on equity of 33% and projected earnings growth of 16%pa for the next three years, there may still be plenty of upside left in this stock for the patient investor.

The author's related parties have holdings in APX

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