Why Appen shares could be a strong buy in August

Is it time to buy Appen Ltd (ASX: APX) shares ahead of its full-year earnings?

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With the August reporting season now upon us, let's take a look at why it might be time to buy Appen Ltd (ASX: APX) shares ahead of its full-year earnings.

The Appen share price has rocketed higher

The Appen share price has been a top-performing growth stock for many years, surging a whopping 4,688% since its initial public offering (IPO) back in January 2015.

Even just in the last 7 months, the Appen share price has rocketed an incredible 135% as its share price growth has made the S&P/ASX200 Index (ASX: XJO) year-to-date return of 22% look like peanuts.

Appen is a leader in the training of machine learning and artificial intelligence (AI) datasets and has continued to expand its client base in the United States and Australia, boosting revenues and allowing for further development of its operational capabilities.

Investors are also betting big on its future growth, with Appen currently trading on a price-to-earnings (P/E) ratio of 78x earnings, meaning investors are paying $78 per $1 of earnings in the expectation of further share price appreciation and the eventual return of capital.

Is it time to buy before results season?

The one big factor that Appen has going for it is it's proven history of outperforming market expectations and its own earnings guidance.

This has been a key reason why the Appen share price has surged 4,688% since its IPO with seemingly constant earnings surprises and upgrades over the last few years.

If Appen can manage to live up to its lofty growth expectations and demonstrate a strong path forward for FY2020 and beyond, I'd expect to see the Appen share price surge higher from its current $30.17 valuation and push towards the $40 mark.

But… what's the catch with Appen shares?

Given the ASX200's strong start to the year, including recently surpassing its all-time, pre-GFC record high, it appears that we're entering or in the midst of a late market bull run.

This has historically been a danger zone for growth stocks like Appen, particularly those with P/E ratios as investors seek the safety of dividends and blue-chip value stocks as fears of a market collapse build.

The other problem I see facing Appen is the potential for the AI and machine learning bubble to pop following a lot of hype around the sector, and this could see the Appen share price fall hard if it can't produce consistent positive free cash flow in the near future.

Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd. 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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