brave souls rewarded today, page-93

Post by Claude Walker at @richlife dot com: The truth about "The Appen Business Model" for those who enjoy prognostication:

"At a share price of $14, Appen (ASX: APX) has a market capitalisation of about $1.7 billion. If we accept the company’s “underlying NPAT” as a true reflection of its profitability, then it would trade at a P/E ratio of 26.5. However, I note that statutory NPAT has been significantly lower than underlying NPAT in the last couple of years.

The business strategy seems to be to reduce reliance on its largest customers and take advantage of the demand for data labelling from customers who do not have the same resources for weakly supervised data labelling. This strategy only really makes sense if you have the view that demand growth from the largest “global” customers will no longer be increasing so strongly.

In a scenario where demand for relevance data labelling from the biggest global players is flatlining for the foreseeable, I think that Appen’s growth will be only modest. In that scenario, the company is probably fairly priced at around $14.In a scenario where demand for relevance data labelling re-ignites, Appen is outrageously cheap, as its most profitable service offerings will return to growth quite violently as operating leverage once again boosts profits above revenue growth.But in the scenario where demand for relevance data labelling actually falls, if only for a year or two, Appen is likely still over-priced, since falling profits will increase its multiple and hamper its ability to grow.

Remember, Appen needs a high share price to execute on its growth-by-acquisition strategy.Ultimately, I think the first scenario is probably my best guess, meaning that I think the market has gotten it “roughly right” on Appen shares given what we now know. But I do not hold this view strongly, and frankly, I do not care to take a strong view. As an investor, I don’t need to. You can’t pat all the fluffy dogs and you can’t own every share that is undervalued.What I think is wrong is the widespread bullish commentary calling Appen shares cheap, while characterising it as a tech stock, rather than a technology driven labour hire firm.

The key question, in my view, is whether or not demand from Appen’s largest customers is flat, increasing or decreasing. Because that’s what will determine whether now is a good time to buy, or not.The author has no position in Appen Shares. This post is not financial advice"