As Switzer Report followers well know, each Thursday at noon, subscribers gather for the Boom, Doom, and Zoom show. One company that the market gave a bit of a kick in the pants to was Appen and questions were raised about this stock, which is into Artificial Intelligence (AI).
On his Switzer TV: Investing show on YouTube [1], Peter Switzer asked Jun Bei Liu from Tribeca Investment Partners what she thought of this Australian WAAAX stock.
“We like Appen,” Jun Bei said. “It’s AI and exposed to the AI spend. It benefited a lot during the COVID lockdown. There was a lot of spend across all these search terms with the large guys but the problem was it was exposed to all these large Silicon Valley clients like Google, Facebook and Microsoft,” she added.
Jun Bei said that with Silicon Valley clients, you just need one of them to spend a bit less, and your earnings visibility becomes poor.
“The client is spending a little bit less, so that has caused a downgrade for earnings. Of course, because its earnings were exposed to offshore, that means US dollar exposure. Appen is going to take a hit to earnings. The long term story is intact. Short term there’s a bit of an issue because people will build a bit of a story about whether the earnings growth is real. Like they always do with every downgrade for every company out there.
“In the next six months, its share price is probably not going anywhere, but I think when it hits closer to that $25 mark, you do want to look into this business. It’s one of the few pure AI exposures here in Australia, and the long term story still is intact. There’s a few question marks, but of course in the short term it’s just been oversold.”
But does Appen have a competitive advantage over its rivals? The fact that they’re an Australian firm doing so well in Silicon Valley makes you think their product is actually quite distinctive, Peter said.
“Oh, absolutely,” Jun Bei replied. “Without the competitive advantage, they won’t get those big clients. The big clients keep allocating more and more money towards them, as well. So, of course the margin is not going to continue to grow, simply because they’re getting a lot of volume. Margins are going to be flattish, but still that’s a good growth outlook for this business,” she said.
Being heavily exposed to California, with the state going into lockdown with all their second-wave infections, is that a problem too?
“Part of the downgrade is because the lockdown has been impacting their earnings. It’s harder for them to sell and get more income, but it is going to be a short term impact. In 12 months’ time, things will recover to normal,” she said.
Appen (APX)
Source: Google
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