Appen Ltd (ASX: APX) used to be part of ASX tech royalty. It was a member of the once-vaunted WAAAX group of stocks, along with WiseTech Global Ltd (ASX: WTC), Altium Ltd (ASX: ALU), Afterpay – now owned by Block Inc (ASX: SQ2) – and Xero Ltd (ASX: XRO).
However, whereas the other WAAAX shares suffered through some rocky post-COVID years but have since mostly recovered to even greater highs (with the exception of Afterpay), the Appen share price has lagged far behind.
Like, really far behind.
Since topping out at a share price well above $40 back in August of 2020, Appen has lost close to 99% of its value, and is now trading for just 52 cents a share. Ouch!
A company that once had a market cap of nearly $5 billion, is now sitting at just over $100 million.
So, what went wrong?
To answer that question, let's start by taking a closer look at what Appen actually does.
What is an Appen?
Appen is a tech company that provides high-quality datasets to artificial intelligence (AI) companies. It uses a crowdsourced global workforce to annotate and curate data which it then sells to big tech companies to help 'train' their AI programs.
Large language models, like ChatGPT, work by ingesting huge amounts of data. The AI algorithm searches through this data to identify patterns, correlations, and other connections, to essentially 'learn' how human language is constructed.
Appen supplies the data.
But hold on – isn't AI meant to be a booming industry right now? It's all over the news – and American AI giant Nvidia Corp (NASDAQ: NVDA) even briefly broke through the magical US$3 trillion market cap barrier. That puts it right up alongside tech behemoths Apple Inc and Microsoft Corp as the largest listed companies in America.
So, if AI is booming, and AI programs need data to function, shouldn't this be fertile ground for a massive rally in the Appen share price? So then why isn't Appen following Nvidia to the top of the stock market?
I'm glad you asked.
Concentration risk
Concentration risk is when a company relies too heavily on a small group of large customers to generate its revenues. If those customers cut back on their spending, it leaves a massive hole in the company's income statement.
Unfortunately, that is what happened to Appen.
It has relied heavily on five major customers to generate most of its revenues: Microsoft, Apple, Meta Platforms, Google parent company Alphabet, and Amazon. And while that might seem like an enviable list of clients to have in your rolodex, relying on them too heavily is still risky.
This came to a head back in 2021, when Apple changed the privacy policy on its operating system to limit the ability for digital advertisers to track customer activity across multiple apps. As part of the Apple update, users could now opt out of having their data collected.
This led to a cutback in digital AI advertising spending from Appen's major clients.
As a result, Appen had to issue multiple earnings downgrades over the years, disappointing shareholders. For an indication of how far Appen has now fallen, compare its FY23 annual revenues of US$273.0 million with the record revenues of US$447.3 million it reported in FY21. That's a decline of almost 40% in just two years.
And there was more bad news to come in January 2024, when Google parent company Alphabet announced it would be severing all ties with Appen. To put this in context, Google contributed US$83 million of the US$273 million total revenues Appen reported in FY23.
Can the Appen share price stage a comeback?
Despite what should be favourable macroeconomic conditions, Appen has continued to struggle – and this latest piece of bad news from Google isn't going to help it at all in the near term.
However, if there is some silver lining to all this, it has been Appen's pivot towards new markets – and away from its reliance on the big hitters in Silicon Valley. Appen's Chinese clients delivered record-high quarterly revenue contribution of US$11.1 million in 4Q23. While this certainly won't make up for the loss of Google, if anything is going to rescue Appen's business it's going to be new clients in new markets.
