@chad987, has a good grasp of the fundamentals of APX. He's previously held, took a loss and is
not a downramper. Understandably, he's frustrated with management due to the share price decline. But, my view is that Appen's management team have acted in the same neutral, low-key, understated manner all the way since 2015. This is a continuation of what we have come to expect from MB. That style works tremendously on the way up when things are going well (50c to $40) but horribly on the way down when things are not going well ($40 down to $8).
I'm continuing to hold because the original investment thesis of mine has not yet had the chance to play out over a full cycle (initiated by COVID where US big tech reprioritised work). Do structural issues concern me? Yes. What concerns me is Facebook's developments in SSL; this absolutely could be a structural issue for Appen. This is why the share price was at $8. But, what reassures me is the number of new projects for Appen (albeit small in value) that are springing up within the
very same big tech companies. The number of new AI use cases is staggering. What also reassures me is the hundreds of millions of dollars of smart money being poured into industry players like Scale AI from some of the best investors in the world. Sure, they are a competitor, but my point is that Scale AI plays in the same arena as Appen. If the data annotation industry was going to 0 (i.e. be displaced) anytime soon, I don't think we would be seeing investment into new data labelling players from firms such as Dragoneer and Greenoaks Capital (both San Francisco-based investment firms), and Tiger Global, the prominent technology-focused investment company based in New York.
Most of Appen's revenue comes from relevance projects for Facebook and Microsoft. Revenue for these projects was down 9% YoY in H1CY2021 v H1CY2020. Appen claims that this is because H1CY2020 had no COVID impact (true at the time for big tech) and H1CY2021 experienced a major pivot of big tech away from ad-related revenue into new AI projects (which initially are less data-intensive). If revenue for content relevance with Facebook and Microsoft does not return by the end of CY2022, then we have a more evidence-based data point to suggest Facebook are removing their needs for data annotation in the relevance space (rather than re-prioritised temporarily). If this is the case, the management team of Appen need to face the public and explain why their explanation at the time deviated from the truth and whether they misled investors. This would be a serious event. But, we don't have to worry about that yet because that is purely a hypothetical at this point in time and Appen maintain that this revenue will return gradually. Management has been truthful along the journey since 50c and I trust that they are doing their best currently to maintain that reputation.
For the moment, Appen's guidance (for flat/increasing revenue) suggests that although there are some amazing breakthroughs taking place in SSL right now, even at Facebook and Microsoft, Appen's services are still needed. What gives me the confidence to continue to hold my major position here and not take the loss is that Appen remains working hand in hand with Microsoft and Facebook to this day. China/Govt/Enterprise are also important and are progressing well, but we want the core of this apple to not go rotten. Encouragingly, Appen has more projects live right now than at any point in their history (many of them are low in value but can grow in time). Appen is also doing increasing amounts of work with major auto companies. This is a competitive space, but great to have a foothold here. Time will be the true test. Solid growth and/or upgrades in CY2022 and the share price has a clear path back to $20+, where I will once more be in profit on my rather large APX holding. There is of course the possibility of further downside if Appen's business deteriorates, but at this stage, I like where the company is at (making acquisitions, investing heavily, acquiring new talent, and with cash in the tank and no debt). I'm happy to wait another few years here to see how SSL evolves, it is definitely a threat, but I don't think it will displace Appen (or Scale AI/Samasource/Labelbox/Hive/Cloudfactory/DataLoop) any time soon. It is often never as good as it seems, but also not as bad as it seems. The truth lies somewhere in the middle. The greed to fear to greed cycle continues, but I am staying the course...
P.S. Will update my sentiment to buy
if Appen can meet their guidance for full-year CY21 and guide higher again in CY22 by at least 20%.
(20min delay)