Appen Falls 30% as Google Terminates its Contract: What’s Next?

This week, we break down the devastating news around Appen (APX) as it faced one of its major customers, Google, terminating its multimillion-dollar contract. The news caused the share price of APX to fall 40 per cent last Monday, although it rallied somewhat later in the week to close the week down 30 per cent.

Interestingly, Appen still hosts clients such as Microsoft, Meta and Amazon on their books. As such, is Appen a classic case of fear-based panic selling, lending itself to potential buying opportunities or has the market got it right?

Will Appen recover or will it fall further?

In evaluating the impact of Google's contract termination with Appen, 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 price had been falling month on month for the better part of three and a half years.

From 1 July to December 2023, it had fallen over 70 per cent alone, so call me sceptical, but I am sure what transpired with Google last week was not a surprise to the big end of town. In fact, I am 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 $82.8 million USD in FY23, the company reported total revenue of $273 million USD in FY23. 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 a 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 the down move is over because the bad news may not be over just yet.

What were the best and worst-performing sectors last week?

The best-performing sectors included Materials, up 3.15 per cent, followed by Financials, up 1.75 per cent and Healthcare up 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, up 11.44 per cent, followed by Iluka Resources, up 10.79 per cent and Resmed, up 7.81 per cent. The worst-performing stocks included Domino’s, down 31.12 per cent, followed by Bellevue Gold, down 9.76 per cent and IDP Education, down 6.33 per cent.

What's next for the Australian stock market?

Last week, I mentioned 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 be spot on.

The All-ordinaries index ended up 1.74 per cent last week and, in doing so, broke a three-week fall, but more importantly, it also broke above the prior week’s high. What is 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 the to 7,000 point level in the near term.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.