Despite trading notably lower than its 52-week high, the Appen Ltd (ASX: APX) share price has been a market beater in 2020.
Since the start of the year, the machine learning and artificial intelligence data services company’s shares have risen a remarkable 55%.
Why is the Appen share price up 55% in 2020?
Investors have been buying Appen’s shares this year after it delivered further strong growth in FY 2020 despite the pandemic.
For the six months ended 30 June 2020, Appen reported a 25% increase in revenue to $306.2 million.
This was driven by the company’s key Relevance segment, which provides annotated data to be used in search technology for improving the relevance and accuracy of search engines, social media applications, and e-commerce websites.
The Relevance segment posted a 34% increase in revenue to $273.9 million during the first half. This offset weakness in the company’s Speech & Image segment, which reported a disappointing 20% decline in revenue to $31.9 million.
Also growing strongly was the company’s operating earnings. Appen reported underlying earnings before interest, tax, depreciation and amortisation (EBITDA) excluding growth investments of $62.5 million, up 35% on the prior corresponding period.
What about the future?
The good news is that management remains very positive on the company’s outlook. It noted that it is has high confidence in the long-term market potential for AI and training data.
Chairman, Chris Vonwiller, commented: “We are especially pleased with this result amidst the pandemic and the implementation of our growth initiatives. The strength of our business model, market exposure, competitive position and our consistent execution give us the confidence to push forward with our investments to solidify future growth.”
Should you invest?
At present, I estimate that Appen’s shares are changing hands at 39x FY 2021 earnings.
While this is a premium to the market average, it is actually very reasonable in comparison to other members of the WAAAX group, such as WiseTech Global Ltd (ASX: WTC). I estimate that its shares are trading at 94x FY 2021 earnings at present.
Overall, I think the Appen share price is a strong buy at the current level and expect its market beating return to continue over the 2020s.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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