Brokers upgrades, page-2

@AJ7,

The broker price target figures I have attached below for you are from prior to Wednesday's business update (19th May). Even before this update, Appen was oversold. I expect upgrades from here, particularly post the August half-yearly results.

This is a major turning point. Appen has provided some detailed visibility into the business on a segment level, that they have never revealed before. Over time, this will highlight the transition of the business to being an AI product-led business with recurring revenue (SaaS).

Over the past half-year, fear, uncertainty, and concerns have been highly exaggerated and this has been accentuated (/been made possible) because of the historical lack of visibility into the business. This restructure and change to segment reporting lines changes the game.

Even very smart people who I have spoken to (who are leaders in the technology sector) have been unfortunately swept up in fear around Appen's competitive moat, considering Appen "a glorified labour-hire company". Today's update and revelation of the revenue split by product/service debunks this myth. But, this is what creates opportunity in the market. Fear creates opportunity. One needs to form a position grounded in deep due diligence and hold it unless the thesis changes.

Here is what the now revealed facts suggest: a) 30% of Appen's revenue is now committed (i.e. recurring). b) The New Markets division (AKA Appen's training data products) comprises 20% of the business (and rising). c) This AI product-led section of the business is at an FY20 run rate of $85M USD and growing at 34% YoY.

If the 'new markets' division (Appen's training data products) of Appen was spun out and listed on the NASDAQ, I would guess it would be valued at $1 billion USD or more, alone, on a circa 10x PSR. Scale AI (a similar sized business to APX's new markets division and similar in tech capability) suggests that it could go for a lot more than that (Scale is valued at $7 billion USD!). This is the tech-enabled component of APX, where the majority of the future growth of the business will stem from.

The global division of APX is also a valuable division of the company, producing consistent mid to high single-digit profitable growth. This part of Appen is producing all of the profit currently (the new markets division has been cash-flow negative but is now at breakeven as of H2CY2020). I'd conservatively value the global division component of APX (i.e. the global tech giants relevance work) at a 10x EBITDA multiple for a value of around [($42m USD H1 + $46m USD H2) x 10 EBITDA multiple] $880m USD = $1.135 billion AUD.

Adding the two components together, using this sum of the parts methodology, I arrive at a current fair valuation of Appen of circa $2.425 billion AUD ($1.29 billion AUD + $1.135 billion AUD). With 123 million shares on issue, this equates to a current fair value share price of circa $20 per share. If you are comfortable forecasting out one year into the future and assume that the global division grows at mid-single-digit figures and that the new markets division grows in line with the AI industry average, one arrives at a price target at least $4 higher than that (i.e. $24+).

You are absolutely correct that a high volume day (such as that we experienced) is highly likely to have been driven by institutional purchases. My own analysis for a 12-24 month view falls somewhere between Citi & Ord Minnett. I believe that achieving a share price in the $25 to $31 range within that timeframe is very achievable.

Lastly, let me say this. If Mark Brayan's understated style (measured, calm and trustyworthy) (whom I support FYI) leads to an upgrade over the next 12 months, then a return to $30+ is well and truly in sight. I'd much rather have a CEO like Mark at the helm, who has a history of under-promising and over-delivering, than a brash and bold CEO who will claim anything to move the share price higher in the short term at the expense of trust, longer term.

As a part-owner of this business, I am not a trader and I am investing capital here for consistent profitable growth in future cash flows. In the short run, sentiment and storytelling are all-knowing. But, in the long run, cash flows are the only thing that truly matters for the share price.


T.E.P.