Bearish Drivers: A variety of factors are conspiring against Appen at the moment (and may continue to over the coming handful of months/quarters): 1. The ongoing fall of the USD (Appen's revenue is almost entirely generated in USD) 2. The evolving regulatory landscape of the US NASDAQ tech giants (Appen's customers) 3. The evolving product landscape of the US NASDAQ tech giants (Appen's customers) brought about by COVID -- shifting away from existing mature AI products into newer AI products 4. A conservative company outlook for CY21 (with earnings back-ended into H2) [a consequence of #3 above] 5. Extremely frothy valuations across the board leading to nervous and skittish investor behaviour 6. The rotation of fund managers away from growth stocks back to value stocks 7, Institutional downgrades (a consequence of all of the above, primarily #3 and #4) 8. Increasing competition and pricing pressure (claimed by the institutional investors, but I do not see material evidence of this in the relevance division and Appen have also disputed these claims) Personally, I believe all of the 8 factors above are temporarily and not long-term structural trends that are here to stay (with the exception of maybe #1). So, in these moments, I like to remind myself of 2 of WB's favourite quotes: A) "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." - WB B) "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table." - WB To have confidence that Appen will return to its long term growth trajectory (in line with the industry growth rate), one needs to have confidence on all (or at least most) of the 8 points above. In terms of #3, all indications suggest to me that Appen has entrenched itself into the new emerging projects that the tech giants are now beginning to grow. These will take time to mature but Appen will be a trusted partner of the tech giants as they pursue new AI products, I simply doubt Appen will get left behind as the tech giants change their product focus (away from advertising - in the light of increasing regulatory pressures.) Volatility: How has the share price fallen 62%, peak to bottom, in the short space of months, even in light of these 8 factors? The truth is that the market is simply not a perfect indicator of business health and is subject to irrational and short-term investor behaviour. The share price has fallen from $42 to $16. This is not because the future prospects of Appen have just happened to suddenly worsen by 62% within the space of a few months. This is not because competitors or pricing has just suddenly happened to dramatically change in the space of months - Appen has been very clear that there is no material change in competitive dynamics, particularly in relevance where Appen is the undisputed market leader. The share price is simply never (and never will be) a perfect indicator of business health. Valuation: Valuing Appen is notoriously difficult. The challenge of this task is evidenced by the fact that fair-value estimates for Appen i) swing wildly within very short spaces of time and ii) vary wildly among the sample set. When a single-year earnings downgrade of circa 15% shifts a broker estimate by more than 50% despite the value of the business being the present value of all future cashflows across the lifetime of the business – we have a massive overreaction. Buy-side research firms simply have no real indication as to the length, likelihood, and size of Appen’s future cashflows over the long term. They are tinkering not just with short term earnings but modifying key long term inputs to their Appen valuation models. Changes to the long-term growth rate or the terminal value of Appen leads to enormous variation in the fair value of the business. From a DCF perspective, in the bear case, I assumed that Appen is unable to meet its promise of returning to an industry-standard growth rate (28% p.a.). I assumed Appen’s top-line grows at 20% in 2021F and then gradually declines (linearly) to 12% growth YoY in 2030F. This is a low-growth scenario in which Appen would be underperforming the industry growth rate by a significant margin. I consider it an unlikely scenario but find it a useful exercise to determine a likely fair value floor in the share price. In this scenario, I assumed a terminal value multiple of 6x 2030F EBITDA to match the assumed low growth trajectory of the business. This scenario leads to a fair value share price estimate of $18.81 per share. Another way to look at it is that at a share price of $16, with 122 million shares on issue, the market capitalisation is $1.95 billion. Using the middle of the CY21 EBITDA guidance ($125M), the company is trading on circa 14x EV/EBITDA. I am very comfortable with that valuation. In fact, I think it is extremely cheap even if growth remains below industry rates going forward. My Prediction: I take a long-term view on value creation, seeking companies that have a disciplined growth strategy, a laser-like focus on their core market and are the leader in their industry. This process gives one the opportunity to look past the short-term valuation metrics and short-term performance if I can have confidence a business has the platform and management team to create a more valuable business on a medium and long-term basis. What I am looking to identify, is a business that might look ‘down and out’ because of a temporary earnings downgrade, uncertainty or scepticism, but offer value in 2 to 5 years on the back of strong compound revenue and profit growth. The long-term trends for Appen remain exceptionally favourable. Spending on artificial intelligence is growing rapidly at 24-28% annually and AI adoption should actually accelerate in a post-pandemic environment according to market observers such as the Boston Consulting Group (BCG). Further, online advertising, a major source of revenue for Appen’s key customers and a reasonable indicator of their spend, is forecast to rebound strongly in 2021 according to analyst forecasts. The structural tailwinds, as well as the strength of the existing pipeline for 2021, support a return to solid growth rates in 2021 in line with industry trends. When stronger growth eventually begins to materialise, institutions will once more swing the pendulum, be caught up in a sea of optimism and upgrade forecasts and price targets once more back into the $30+ price range. Strategy: No-one can profess to pick the bottom, but the tide will eventually turn. Markets always oscillate around fair value - in the case of APX, the pendulum swings are quite wild indeed. My personal strategy is to gradually dollar cost average into APX as/if it falls further, from current levels (c. $2.2 billion MC at $18). Always leave cash in the tank for unexpected drops, never go all in. Also, I personally hesitate to go beyond 20% portfolio weighting for a single stock, this is something that I also keep in mind. With pessimism and uncertainly clouding investors’ judgement right now, short term fluctuations appear to have crept into long term assumptions from the institutions. This forms part of my investment thesis and is part of what I aim to take advantage of over the next 12-24 months with the Appen share price as long-term growth assumptions normalise again once Appen proves this current set back is temporary. I believe anyone entering at current levels will do very well over the medium to long term from these price levels.

Great article Bella. Very well written

I really liked the way Bella wrote that Wire it added a bit of ..Spark .

Thanks Geoff, glad you enjoyed it.

Thanks Gavin!

Hi Tom. Thanks for the comment. All very interesting points that you raise. Appreciate the analysis.

Service Stream SSM didn't have a bad result I thought. However the market has punished it for some reasons. Can someone have a look at it please?

Bella and LiveWire team - Per below, Tom has written extensively in 'Comments' on Appen previously including here -> https://www.livewiremarkets.com/wires/the-most-tipped-large-caps-for-2021 I think you need to get him on to write a contributing article and, in the interests of transparency, to declare his self-evident barracking for - and investment in - APX :) Good write-up, Bella. My question for the BHS segment you mention above is whether the panel (Michelle and Simon) thinks the improvements we saw in GPM and Operating Margins in many companies are sustainable. If we take out JobKeeper, etc being 'negative' expenses and the stimulus measures ie, wind-down of JobKeeper, JobSeeker, will we see a moderating of revenue growth and expense management?

Thanks Bella for another informative and interesting article written in a style that is both enjoyable and easy to read. Thanks to Tom also for his very in-depth contribution! Like Robert, I would be interested to see what the BHS analysts think of Service Stream's rapid decline in value flowing the release of their results. From the outside, it appears to be a significant market over reaction, similar to what Tom was indicating with that of Appen.