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Is Appen shaping up as a local stock alternative to AI wunderkind NVIDIA?
The surge of NVIDIA in 2023 – the chip-maker is up 164 per cent so far this year, and has more than quintupled in price in the last five years – has many investors looking for the way to ‘play’ AI.
NVIDIA hit the jackpot with the world’s first computer chip architecture designed for the so-called ‘generative AI’- artificial intelligence systems that can quickly create human-like text, images and content. The company’s technological advance coincided with ChatGPT taking the world by storm.
Financial information website Wallmine.com puts analysts’ consensus 12-month price target for NVDA (its ‘ticker’ code) at US$588, implying a 55 per cent rise.
But home bias being strong in Australia, many investors will want to gain their exposure on the ASX.
The obvious candidate is Appen (ASX: APX), which is a third-party dataset provider for AI and machine learning algorithms. Appen uses crowd-sourcing methods to generate the data that goes into the machine learning models of many of the biggest tech companies in the world, used in everything from search engines to voice assistants and image recognition technology.
Appen provides data ‘labelling,’ which is the process of identifying raw data (images, text files, speech files, videos, alpha-numeric data etc.) and adding one or more meaningful and informative labels to provide context, so that a machine learning model can learn from it.
The Australian firm’s edge in this market is that it has a crowd of more than one million contributors spanning more than 170 countries, and speaking more than 235 languages and dialects, evaluating, contextualising and annotating data. This diversity offers Appen’s customers advanced and curated data labelling capable of incorporating highly specific cultural, language and social nuances.
Appen works with some of the biggest users of AI in the world such as Google, Amazon, Microsoft, LinkedIn, Salesforce, Adobe, Oracle, Boeing and Airbus. Eight out of the ten largest global “big tech” companies by market capitalisation are clients, and its top five clients have been with it for an average of more than nine years.
The unique nature of its crowd asset, and its stature in the tech world, made Appen a market tech darling on the ASX for a long time. Listed in January 2015 at 50 cents a share, the stock became an ‘eighty-bagger,’ peaking at $40 in August 2020. Along the way, Appen became one of Australia’s so-called ‘WAAAX’ tech stocks along with Xero, WiseTech, Afterpay (now Block) and Altium – the ASX’s answer to the FAANG grouping (Facebook, Amazon, Apple, Netflix and Google, which now trades under its parent, Alphabet).
But Appen lost that status. If you paid $40 for the stock in August 2020 and still own it at $3.27, you’re down 91.8 per cent.
What went wrong?
The prosaic reason is that for all its ‘tech’ gloss, Appen’s fortunes ultimately ride on digital advertising demand, and the spending of its largest customers to capture that demand. From 2021 onward, that demand was pummelled by a toxic cocktail of economic downturn, regulatory crackdown, a general sell-off in tech stocks as interest rates rose, the rise of competitive Indian outsourcing and privacy changes that Apple made to the iPhone operating system, which made it harder to track customers and target mobile ads to users.
A succession of six earnings downgrades dating from late 2020 – and a takeover approach in May 2022 by Canadian company Telus International that was pulled very quickly, when the Canadians apparently balked at another downgrade – hammered the share price, which sank as low as $2.15 last month, before Appen bit the bullet on a $60 million capital raising, at $1.85 a share, a 19.6 per cent discount, a raising that increases the number of shares on issue by 26 per cent.
The company said it would use the funds to strengthen its balance sheet and diversify its revenue to return the business to profitability, while it also looked to cut its operating costs.
Appen’s plans to rejuvenate its business have seen a bounce, to $3.27: the stock has gained 31 per cent in the last five days. But can it recover to anywhere near what many, many pained shareholders would have paid for it?
The bear case is aptly put by broker Morgan Stanley; that its “human-based model is less economical than competitors’ automated solutions”.
The company says the opposite; that the new wave of generative AI still needs humans to make it truly useful. Appen has launched generative AI-related services, such as providing human feedback for large language models, for enterprise customers. For example, Appen’s new assurance products ensure customers’ AI models are accurately measured and monitored to avoid risks such as bias, toxicity and “hallucination” – the industry’s term for when the technology sprouts complete nonsense.
Appen chief executive Armughan Ahmad has said that generative AI is an opportunity for Appen to diversify its client base, at present heavily concentrated among Google, Apple, Microsoft, Meta and Amazon. The company has announced a vision to expand beyond data for AI and build industry vertical-focused AI solutions, which it says can expand its total addressable market 20-fold. Appen says it can win because it has “a front-row seat on latest AI Innovation” from leading tech companies, “deep industry vertical expertise”, its partnerships with AI ecosystem leaders and its “execution-focused leadership”.
Ahmad has also told the market that the executive team’s remuneration is closely aligned with improving the share price, noting that they need Appen’s share almost to triple to receive almost half of their stock.
Analysts have trouble buying this thesis. On Stock Doctor/Refinitiv, 12 analysts arrive at a consensus target price of $2.04; on FN Arena, four analysts contribute to a target price of $1.89; while on Wallmine.com., an undisclosed number of analysts generate a more promising target price of $5.00.
So you either have to back the company, or back the analysts.
It all might be too hard for ASX investors, but there are other, more diversified ways to ‘play’ AI, in the form of two specialised ETFs, BetaShares’ Global Robotics and Artificial Intelligence ETF (ASX: RBTZ) and Global X Global Robotics and Automation ETF (ASX: ROBO). This pair offer investors access to portfolios of the world’s leading robotics and AI companies, in one stock (NVIDIA is the top holding of RBTZ, accounting for 11.4 per cent of the portfolio.)
As with any ETF, you get the winners in the space as well as the laggards. But the diversification and ease of access of the ETF takes the kind of single-stock risk that hangs all over Appen right out of the question.
