Here's why the Appen (ASX:APX) share price is sinking

The Appen Ltd (ASX:APX) share price was crunched 9% today as investors sold off after a negative broker report from Macquarie.

| More on:
appen share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Appen Ltd (ASX: APX) share price dropped by 9% today after it was on the receiving end of a negative broker report.

Analysts at Macquarie Group Ltd (ASX: MQG) issued a painful downgrade of expectations for Appen this year.

Here's what happened to the Appen share price

Appen shares suffered after Macquarie downgraded the technology business from 'outperform' to 'underperform'.

Macquarie thinks that the FY20 result is now going to be a 'non-event' because of increasing competition and this will cause Appen to lose market share. But the broker doesn't think this competition is a short-term problem – the headwinds could continue for the rest of 2021. It may then lead pricing competition for Appen.

The broker thinks that other brokers could follow suit with downgrades for Appen.

The Australian Financial Review quoted Macquarie analyst talking about how competition could affect things for Appen:

Increased competition has been partially cushioned by greater demand, but supply increase has outstripped demand. Pricing is not yet a lever to differentiate between outsourced solutions, but as competition intensifies in 2021, we see downside risk to street revenue forecasts as this comes into play.

Appen's new share price target and earnings expectations

Macquarie has set a new price target for Appen of $19. That's still a potential downside of around 18% despite already falling 9% today.

The broker is now forecasting that Appen will generate 51 cents of earnings per share (EPS) in its FY20 and 65 cents of EPS in its FY21.

That suggests that the Appen share price is now valued at 45 times FY20's estimated earnings on Macquarie's projections.

What was in the last trading update?

Appen announced a trading update in December 2020.

In that ASX release, the company referenced the fact that on 15 April 2020 it said that the COVID-19 pandemic may dampen 2020 performance through a slowdown in digital ad spending, a reduction in IT/digital spending, a reduction or cancellation of services from Appen's smallest customers, interruptions to global hardware supply chains and suspension of face to face projects such as audio data collection.

After completing its November results, Appen said that while the fourth quarter has improved compared to the third quarter, the usual ramp up it normally sees didn't eventuate.

The Appen share price has fallen 23% since this update.

Management said that the pandemic had disrupted and reshaped the priorities of customers, especially in California. Appen said client resources are being put towards new product areas that enhance their long-term resilience and value which is currently impacting work volumes on some large mature projects. At the time, Appen said that was positive for the company.

The company said that the long-term trends for the business remain very positive, with spending on artificial intelligence growing rapidly at 28% per annum.

Appen said that the structural tailwinds, as well as the strength of the existing pipeline, should support a return to strong growth rates in 2021.

In the trading update, Appen said it's expecting underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY20 to be in the range of $106 million to $109 million, with second half underlying EBITDA expected to be at least 30% stronger than the first half.

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Appen Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Fallers

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Healius, Light & Wonder, REA Group, and Regis Resources shares are falling today

These shares are ending the week in the red. Let's find out why.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why ANZ, Brainchip, Light & Wonder, and Pilbara Minerals shares are falling today

These shares are tumbling on Thursday. But why?

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why Aurizon, JB Hi-FI, Nuix, and Platinum shares are tumbling today

These shares are falling on hump day. But why?

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why HMC Capital, Platinum, Sigma, and Skycity shares are dropping today

These shares are having a tough session on Tuesday. But why?

Read more »

Oil worker using a smartphone in front of an oil rig.
Energy Shares

ASX 200 energy shares plunge on shock OPEC move

ASX 200 energy shares like Woodside and Santos are tumbling on Monday. Let’s find out why.

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Brainchip, Helia Group, Reliance Worldwide, and Westpac shares are dropping today

These shares are starting the week in the red. But why?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Block, Corporate Travel Management, Judo, and Zip shares are sinking today

These shares are missing out on the good times on Friday. But why?

Read more »

Man with a hand on his head looks at a red stock market chart showing a falling share price.
Share Fallers

These were the worst-performing ASX 200 shares in April

These shares were out of form last month. But why?

Read more »