Treasure Chest: Appen Downgraded

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In the wake of Appen’s shock trading update and limited visibility, Macquarie has downgraded the stock to Underperform.

By Greg Peel

Whose Idea Is It?

Macquarie

The Subject:

Artificial intelligence technology company Appen ((APX)).

Yesterday, Appen provided a first half trading update and full-year outlook ahead of its official result release later this month. Suffice to say, it was disappointing.

The company’s underlying earnings margin collapsed to 4.6% in the first half FY22 from 14.3% in the same period last year. While there was some negative impact from currency, Macquarie sees the key driver as being a -7% decline in revenue year on year meeting a 3.2% increase in operating expenditure.

The underlying issue is a drop-off in digital advertising demand.

The update reflected lower margins, lower growth, more investment and less certainty over the conversion of forward orders to sales compared to prior years, Macquarie notes.

Management stated they are reviewing all investments in the business to accelerate productivity improvements and margin expansion, but beyond this were not able to provide any details as to how they planned to achieve this. No clear time frame was provided when asked how long this review process had been going for.

Management does expect a better second half, but warns of an uncertain environment adding further risk.

Yesterday, the share price dropped -27%. This has not stopped Macquarie downgrading its rating to Underperform from Neutral. The broker has cut its FY22-26 earnings forecasts by -65-82% and lowered its price target to $3.50 from $5.70.

More Info:

The considerable and non-linear growth in spending by Appen’s small number of highly concentrated and meaningful global technology clients had been the clear driver of Appen’s organic revenues to this point, which had been expanding on a three-year compound annual growth rate of 48% to FY20, Wilsons notes.

It is this same cohort that is now resulting in Appen’s slowing growth profile from weaker digital advertising demand.

On the back of Appen’s update, Wilsons has maintained a MarketWeight rating (note the share price fall) but has cut its target by -23% to $4.44.

JPMorgan notes Appen’s update mirrors some of the recent takeaways from US social media platforms such as Meta (Facebook) and Snap, which are seeing impacts from a weakening macro backdrop, Apple’s privacy rule changes and competition from TikTok.

In the broker’s view, Appen needs to provide a clearer framework for how it will manage the pivot away from its large social media/advertising customers to deliver on its ambitious 2026 targets.

JPMorgan retains a Neutral rating, but cuts its target to $4.00 from $7.00.

Bell Potter retains a Hold recommendation but cuts its target to $4.25 from $6.50. The broker slashed earnings and dividend forecasts but does expect Appen will pay both an interim and final dividend, although this is unclear given an expected underlying net loss in the first half.

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