Appen and the Nasdaq, page-77

What Facebook’s dismal share result means for AppenYolanda RedrupReporterFeb 6, 2022 – 2.35pmShareThere’s a big question on the lips of Appen analysts, investors, and even its CEO Mark Brayan: how will Facebook respond to its forecast multibillion dollar drop-off in advertising revenue?The parent company of Facebook, Meta, suffered the worst one-day fall in NASDAQ history last week, losing $US230 billion in value, after forecasting substantially lower revenue than expected for the first quarter of 2022.Appen CEO Mark Brayan says the company is working on diversifying its revenue streams. Steven SiewertWhile multiple factors led Facebook to drastically miss forward-looking analyst consensus figures, a big reason – and the one that affects Appen – was that as many as 84 per cent of Apple iOS users are opting to block the app tracking technology that underpins Facebook’s targeted advertising revenue.This, Meta estimated, would cost the social network as much as $US10 billion in 2022.Appen, due to report interim earnings on February 24, counts the world’s largest technology companies as its biggest customers, providing them with human-annotated data to train AI algorithms used in everything from search engines to voice assistants and image ofrecognition technology.The bulk of its revenue is generated by providing annotated data that supports the big tech giant’s targeted advertising algorithms.Appen was already suffering from a reduction from the tech companies on advertising-related AI program spending. With the severity of the impact of the privacy changes now known, RBC Capital Markets head of Australian equity investment research, Garry Sherriff, says the short-term risks are high.“Facebook has said it’s looking to adjust its infrastructure to cope with Apple’s privacy changes for iOS devices. There’s a huge amount of investment in Facebook’s infrastructure to improve the ad targeting to counter the loss of signal Facebook has seen since mid-2021 when Apple privacy changes occurred,” Mr Sherriff told The Australian Financial Review.“[But], there’s also nothing stopping Facebook saying we need to improve ad targeting as quickly as possible, and we need as many data points as we can, so it’s not inconceivable that Facebook throw more orders at Appen to see if that data can improve their ad targeting efficiency.”Appen CEO Mark Brayan believed it was too early to draw correlations between Facebook’s result and Appen. He said while there was potential it could give the company a boost, the company was also actively investing in diversifying its revenue streams.“Given how important advertising is for the business … I have every confidence [Facebook] will solve this problem,” he said.“But, this is one of the many reasons we have gone to China. We need a more broad and diverse customer base. Our strategy has long been to serve our biggest customers, but also to grow our customers outside that, as well as the types of things we can sell them.”Already trading near its lowest point since 2018, Meta’s record-breaking wipeout last week barely registered in the local company’s market movements, with investors already factoring in a hit to its revenue.Plagued by a series of downgrades, Appen shares are trading down almost 60 per cent in the last year, from a high of $25.46 a year ago to only $9.46.Mr Sherriff said formerly there was a loose correlation between the performance of the tech giants and Appen’s results – when advertising revenue was flowing in for the tech companies, Appen was getting orders – but in recent quarters there has been a divergence.“As much as Appen management says ‘this is what we’re hearing from our customers and the orders are coming, be patient’, it’s been more than 12 months and the orders have not materialised,” he said.“They need to buck the trend and provide guidance that doesn’t get downgraded.“This is where the difficulty is – it’s a revenue visibility problem,” Mr Sherriff said.Appen has forecast underlying earnings before interest, tax, depreciation and amortisation of $81 million to $88 million, and expects it to come in at the bottom end of this range.Mr Sherriff said it was almost a coin toss whether Appen hits its guidance this earnings season.“Historically, the second half EBITDA skew has been 55 per cent, and they need to do 65 per cent of their full-year guidance in the second half … they’ve never delivered that level of skew before.“Also take into consideration macro-economic factors that are likely to be headwinds in the Decemeber quarter – omicron disruptions, supply chain issues and labour cost escalation,” he said.“Looking at consensus forward multiples relative to historical multiples, Appen’s EV/EBITDA multiples are at all-time lows, and the share price is at four-year lows.“If they get close to their calendar year 2021 guidance forecasts … the share price will pop, particularly as shorts close. But this may be short-lived, because the market still has limited conviction around Appen’s businesses revenue visibility.“Yolanda Redrup