Appen’s Machines Learn Fast

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An aftermarket guidance upgrade from new world advertising and promotion provider Appen has brokers scrambling to upgrade forecasts.

– Substantial earnings upgrade
– Accelerating demand
– Rating upgrade
 

By Greg Peel

The rise of social media and mobile technology has meant advertising can be specifically tailored to its target audience to provide a far more engaging brand promotion campaign. Using machine learning technology, Appen Ltd ((APX)) offers such a service, specifically translated into whichever language that target audience may speak.

At its result release in February Appen guided to full year (calendar 2017) earnings growth in mid-teens percentage. After the closing bell yesterday, the company upgraded that guidance to 40-50% earnings growth. The upgrade reflects the recent receipt of orders from existing customers, a sharp increase in monthly revenues from existing and new customers, and increased margins thanks largely to new projects.

The company did not update on its order book but Canaccord Genuity expects an update will come at next week’s AGM. The broker believes the $70m order book figure provided in February could rise to as much as $100m. There remains the matter of the Microsoft contract renewal due mid-year, but while Bell Potter wants to await that outcome before becoming more definitive in its view, Canaccord suggests the deal is a relatively less important part of the business than it used to be.

Bell Potter has nevertheless been expecting some sort of guidance upgrade, and now that this is confirmed, has reduced the risk discount it applies to valuation to -5% from -15%. Add in earnings forecast increases of 25%, 22% and 21% in 2017-19, and the broker has lifted its target to $4.00 from $3.60, maintaining a Buy rating.

Canaccord has upgraded its rating to Buy from Hold following a target increase to $3.60 from $2.80. The broker notes the relevance of the placement of online advertising has been a high profile issue over the last few months with “some high profile failures”. Most notable has been the loss of business suffered by YouTube for failing to vet advertisement positioning, such that in one example, UK government advertising was placed alongside extremist material.

The broker therefore suggests Appen’s upgrade has been driven by the company’s machine learning product development from a qualitative perspective. There is a continuing need for optimisation in this area. Management cites accelerating demand for the company’s high quality data for machine learning-based product development.

Sigh. I preferred it when we all sang along to TV jingles.

Appen is not covered by any of the eight major broking houses in the FNArena database.

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