Time to change your mind?

“Patient opportunism, buttressed by a contrarian attitude and strong balance sheet, can yield amazing profits during meltdowns” - Howard Marks

I struggle to find many others companies that have fallen so far out of favour with the market as Appen.

12 months ago, Appen was a $~4.5B company, today it’s a ~1.1B company. Certainly this isn’t completely unparalleled, especially in small caps, bute even with all the development that have unfolded in that period, it’s seems difficult to believe in the efficient-market hypothesis which such figures.

Perhaps a lot of investors decided the questions that need answering to hold Appen are a little too complex. Here are some I think are important:

• Are we really at the point where machines will be teaching machines?
• How easy or difficult is it to get a seat at the table with these giant tech companies and convince them you can help them develop their artificial intelligence models?
• Are Appen telling the whole truth about Ad Revenue when these big tech firms appear to have growing ad spend?
• Will Snorkel’s success rip the whole demand for assistance to shreds?

Or perhaps it’s even simpler, my perspective on Appen is that the very emotional ride of the share price in the past 2 years has put off those that held it; many have come to the conclusion the space is too difficult to study, it’s moving too fast and if you combine that with a 60% loss in your initial investment, well it makes sense to exit. So is this in with the new out with the old?

On one end of the spectrum, some believe Appen is nothing but an expensive labour hire firm. On the other, we have those that believe that AI projects are growing exponentially in numbers, and that human assistance will continue to grow exponentially in necessity as the scale and complexity of these projects continue to evolve (ie. interpreting video vs. interpreting images). I find myself leaning closer to the later.

It’s a very difficult debate to have an accurate point of view one, and more importantly, solving this debate will not even provide us that clear a picture on Appen’s future; good businesses evolve quickly, and the services they provide today may look very different to what they will provide in 5 years time.

Certainly, the recent news has been difficult to swallow; down 2% on overall group revenue, margins under pressure, fears of solutions like Snorkel that will make labeling unnecessary.

My belief is that in a market where the average PE is well in the 30s, Appen is trading at a reasonable price as it stands. 1 year ago, the valuation left little room for error, as things stand, trading at Enterprise value/EBITDA of 14, Appen don’t need to get absolutely everything right to win, If they continue to execute in growing markets, continue growing their new ARR model, continue to broaden the scope of AI projects they take on, well, the shares will perform above the benchmark.

Being the contrarian is one thing, being right is more important, and there’s never any certainty on that. Some of the smartest investors I follow are on the other side of the trade I’m making today. But I thought I would publish this here really to keep myself honest, and if things go sideways for Appen, well, I will have learned a lesson. To quote the same genius I quoted at the beginning, “Experience is what you got when you didn’t get what you wanted.” ? Howard Marks