Appen shares were upgraded to “neutral” from “underperforming” broker Macquarie, which warns that further downward earnings revisions cannot be ruled out. Its target price is still $ 16 per share.
Appen’s price sensitivity is such that a 1% change in prices equals a 7-9% change in profits on a financial basis from 2021 to 2023.
A more competitive market for Appen, which sells data for artificial intelligence and machine learning applications, torpedoed the share price.
Appen stock has underperformed the IT sector by 26%, after falling 33% in the past three months.
“We see prices as the last predictable negative catalyst for the company which remains an overhang at this stage,” warns the broker. However, he assumes that most investors are aware of the risk of a price war.
“A negative flow of information to this effect would probably not be a significant negative catalyst.
Having acknowledged that: “We believe that price competition could lead to larger-than-expected profit downgrades for Appen, which may not be fully reflected in current valuations.
Macquarie is already assuming declining EBITDA margins in the absence of any further deterioration in prices.
Macquarie expects 2021 financial revenue of $ 623 million and EBIT of $ 71 million. A drop of just 1 percent in prices would equate to revenue of $ 617 million and EBIT of $ 65 million.
The broker’s target price of $ 16 per share is based on 33 times financial earnings for 2021, which is the historical stock average, but that only leaves a return of around 5% over the place where it is currently trading.
Appen is expected to earn 57.8 ¢ per share in 2021, 70 ¢ in 2022, and 83.9 ¢ in 2023. Much of the difference between revenue and profit below Macquarie consensus and the street lies in the depreciation assumptions.
Appen boss Mark Brayan will make a presentation at the Macquarie Australia Conference next week.