Appen Strategic Valuation

Lots of chatter that APX cannot be valued using the criteria used to value a 'value company'.
Appen is a growth company and thus its valuation matrix has to be different.

There are two basic methods to value a growth company:

a) By comparing it to other growth companies in the market: ie a 'relative basis'.
b) By trying to create an absolute valuation that increases over time (ie as earnings increase its valuation increase).

The biggest risk with (a) in my opinion is that you are valuing based on the current market's willingness to pay, ie the price the market is willing to pay for growth stocks could be either significantly above, below or on par with the companies actual value (ie its intrinsic value), and ones 'value' is simply derived on a relative basis to the rest of the 'growth' market.

I never use relative basis because I want to invest, not trade.

But the difficulty with (b) is that the larger to estimated growth, the more difficult it is to actually value: how long can the high growth be sustainable, what is the addressable market size, are periods of slower growth merely operational/temporary or are they structural.

I have watched Appen for a while amazed at the price rises. I think with the boom in the anything tech, many where justifying their valuation using (a). So their shock on the share price correction is amazement that the market can get it so 'wrong' on its pricing on the way down. However in my opinion they should have been focusing on (b). An analysis of (b) creates a far lower price than where Appen has historically traded.