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Appen (ASX:APX) closed last week down 30 per cent after one of its major customers, Google, terminated a multimillion-dollar contract.
Interestingly, Appen still hosts clients such as Microsoft, Meta and Amazon on their books. As such, I wonder whether Appen is a classic case of fear-based panic selling, lending itself to potential buying opportunities, or, has the market got it right?
In evaluating the impact of Google’s contract termination, it’s important to remember that only last month, Appen successfully raised capital, returning the company to profitability.
While some pundits have called the announcement by Google ‘unexpected’, you only need to look at the share price to see that Appen’s stock had been falling month on month for the better part of three and a half years.
Between July and December 2023, it lost over 70 per cent, so call me sceptical, but I am sure what transpired with Google last week was no surprise to the big end of town. In fact, I’m confident that the big end of town will be profiting from the news.
What I find interesting is that while Appen’s revenue from Google was US$82.8 million in FY23, the company reported total revenue of US$273 million for the year. A 30 per cent loss in revenue is never a good situation for any company, but is it enough to break the company? Especially, given the calibre of its other clients? In addition, Appen is in the strong growth area of data, machine learning and artificial intelligence.
Appen’s journey from successfully raising capital to the termination of a major contract with Google shows the volatility and challenges companies in the AI industry face today. While you might look at Appen’s share price right now and see a bargain, I would caution investors against buying in just because it appears cheap. Remember, we must always do our due diligence to confirm if the down move is over, because the bad news may not be over just yet.
Best and worst-performing sectors last week
The best-performing sectors included Materials, which was up 3.15 per cent, followed by Financials, up 1.75 per cent, and Healthcare by 1.65 per cent. The worst-performing sectors included Information Technology, down 0.24 per cent, followed by Consumer Discretionary, up 0.51 per cent and Energy, up 1.04 per cent.
The best-performing stocks in the ASX top 100 included Alumina (ASX:AWC), up 11.44 per cent, followed by Iluka Resources (ASX:ILU), up 10.79 per cent and Resmed ASX:RMD), up 7.81 per cent. The worst-performing stocks included Domino’s Pizza Enterprises (ASX:DMP), down 31.12 per cent, followed by Bellevue Gold (ASX:BGL), down 9.76 per cent and IDP Education (ASX:IEL), down 6.33 per cent.
What’s next for the ASX?
I mentioned last week that late January could signify the perfect time for buyers to return to the market with reporting season just around the corner, and my timing may well be spot on.
The All Ordinaries index ended up 1.74 per cent last week and broke a three-week fall, but more importantly, it also broke above the prior week’s high. What’s interesting is that the buyers began their charge from 7,550 points, which has been a strong level of resistance for the majority of 2023.
Normally, previous levels of resistance become future levels of support (and vice versa), so, given the market has bounced from the 7,550 level, buyers are now eyeing off the all-time high of 7956.30 points set two years ago in January 2022.
Furthermore, the market has been buoyed by a strong financial sector, which has outperformed – given it is up 3 per cent for the month. Based on the weighting of the financial sector on the All Ordinaries index, I am leaning towards buyers increasing in numbers and pushing prices up above the all-time high over the next 4 to 6 weeks.
While I remain more bullish about the Australian market this year and would not be surprised to see it trading at 8,300 points and above, if weak reporting numbers come out in this first reporting season of 2024, I would not be surprised if sellers step back into the market to take profit and retest the 7,550 level. Any strong breaks below 7,550 or 7,500 points could indicate further falls down to the 7,000 point level in the near term.
For now, good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
For more from Dale Gillham and senior investment analyst Janine Cox, you can also see Dale’s HotCopper show here on Tuesday mornings from 10.30am and the interactive Wealth Within TV live on YouTube every Tuesday at 7pm (AEDT).
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