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Appen share price: what’s the outlook following FY19 earnings upgrade?

We examine the details behind Appen’s just announced FY19 earnings upgrade.

Appen rises on earnings upgrade Source: Bloomberg

Market forces often prove to be incredibly mysterious.

A pool of unknown players buying and selling assets for an endless sum of reasons. Some are short, some are long. Some use a value-based methodology while others look for growth at all costs. Bad and good actors abound.

The point here is that markets are wild and unpredictable. Yet even amongst this chaos, one thing that seems to hold mostly true is that the market likes earnings upgrades.

Unsurprising then: the Appen (ASX: APX) share price soared as much as 13.99% today – even as the broader market was battered – after the AI-focused tech company announced a sizable earnings upgrade.

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Appen share price: earnings upgrade at a glance

Centrally, Appen today announced that it now expected FY19 earnings to come in at the range of $96m (+11m) to $99m (+9m). Previously, the fast-growing company had flagged full-year earnings around the $85m to $90m mark.

Management noted that this upgrade was 'driven by increases in monthly relevance revenues and margins, largely from existing projects with existing customers.'

Though the company did hedge these statements to some degree, pointing out that even now, 'full year earnings are susceptible to upside or downside factors including timing of work from major customers and Australian dollar fluctuations.'

Little did that such qualifications matter: by the afternoon the Appen (ASX: APX) share price had shot up 13.99% – to $26.57 per share as of 14:47 AEST.

For those new in the stock, this would have been a welcome development indeed. Yet two points should be remembered:

Appen, a growth powerhouse, still trades well ahead of the market with a PE ratio of 55.2 – according to the ASX.

In addition to this, the stock still trades some 17% below its July peak. Here, Appen reported earnings that were evidently not quiet ‘growthy’ enough, or maybe just as importantly, traders were taking profits on a stock that had more than doubled since January.

Whatever timeframe one looks at: today’s material upgrade is a distinct positive for the company.

Broker outlook

Another unsurprising development then: Royal Bank of Canada (RBC) analysts took today’s earnings upgrade to reiterate their outperform rating and a share price target of $34.00.

Speaking to the broader outlook, RBC noted that Appen’s business continues to grow at an exponential rate, as the demand for data in the AI space itself grows.

Maybe most promising then is the reminder that the data needs of the AI industry remains underdeveloped and Appen a leading player.

The implications here may help to explain Appen’s significant valuation.

It will be interesting to see what (if anything) other brokers say in the days ahead.

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