CIE Stock in Focus: Appen (ASX:APX)

A key objective for Contango Income Generator is to deliver an attractive and sustainable income stream by investing in mid-cap companies with defensive business models and predictable earnings growth. While generating a sustainable income stream is the company’s primary objective, part of the portfolio is reserved for investments which demonstrate the opportunity for long-term capital growth.

This mid-monthly update focuses on a growth stock in the CIE portfolio with stable earnings and a growing market share – even in a COVID-19 world. The stock has outperformed the market by 30% year-to-date.

Stock in focus: Appen (ASX:APX)

Appen collects and labels images, text, speech, audio, video, and other data used to build and continuously improve the world’s most innovative artificial intelligence (AI) systems. Founded in 1996, Appen has over 20 years’ experience working with leading global technology companies and has offices worldwide.

APX’s expertise includes having a global team of over one million skilled contractors who speak over 180 languages and dialects, spread across 70,000 locations in 130 countries.

Appen has the industry’s most advanced AI-assisted data annotation platform. The business provides reliable training data to give governments and leaders in technology, automotive, financial services, retail and healthcare industries the confidence to deploy world-class AI products.

The Story

Appen was founded by Dr Juli Vonwiller, a linguist researcher at the University of Sydney and Chris Vonwiller, Managing Director of Telstra’s multimedia division, in their North Shore Sydney home. APX listed on the ASX in 2015 and is considered to be one of the newer tech ‘stars’. The business is one of the few companies that provides exposure to the fast-growing AI sector.

One of the core issues with technology companies today is their lofty valuations and unprofitable business models which haven’t been tested through market cycles. APX is one of the few exceptions.

Appen Revenue by Cohort

Source: Appen 2019 Results Presentation
Chart shows revenue by cohort in year of origination and each successive year thereafter

APX has a proven history of being profitable since listing and producing cash earnings to underpin its valuation. The company has significant tailwinds, with one recent forecast showing that spending on AI systems will reach $97.9 billion in 2023.

What do They do?

In simple terms APX converts images, speech, searches and other information into data that algorithms can read and process. For example, when you perform a Google search for “Where to find toilet paper?” how does the Google platform know which search is relevant to you in Australia vs someone searching the same question in Europe?

APX labels which searches are relevant for various customers, largely working with the big 5 tech firms: Google, Facebook, Microsoft, Amazon and Apple. The company helped Apple develop its voice assistant app Siri. This labelling is done by human workers from all over the world, who work remotely on APX’s platform.

APX has many growth leavers to pull to ensure the business keeps growing into the future, some of which are: increase penetration with smaller businesses, government contracts and rapid pipeline expansion in China.


Source: Bloomberg

Where APX Sits in the CIE Portfolio

The primary objective of Contango Income Generator is to provide a sustainable income stream to investors, a portion of the portfolio is allocated to investments which demonstrate the potential for capital growth. These companies play a key role in growing CIE’s portfolio over the long term. The recent sell off has provided the investment team with the opportunity to add some high quality names to the portfolio, which the team believe have been unfairly sold off with the rest of the market. CIE used this sell off to initiate a position in APX at around $17 per share.

APX sits in this growth bucket for CIE, allowing the portfolio to gain exposure to a growing company with strong underlying fundamentals as well as stable earnings. This has been demonstrated by APX reaffirming FY2020 guidance of 76–83% EBITDA growth despite the current market volatility.

Appen maintains a very healthy balance sheet, with cash resources in excess of $100M, meaning it is well positioned to weather the pandemic.

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