Appen Fuels Growth with US Acquisition

Appen Ltd [ASX:APX] has been one of the hottest stocks this year.

The machine-learning and artificial-intelligence business has climbed almost 100%. The stock now trades for more than 43-times earnings. Meaning investors are willing to pay $43 for each dollar of earnings.

Appen stock price

Source: Google Finance

Could the stock climb even higher on the back of the company’s most recent acquisition?

Bolt-on Acquisition to Significantly Boost Sales

Appen’s core business is to help search and social media companies deliver relevant content to their users. They do this through annotated data and language translation to improve content relevance.

According to its 2016 annual report, approximately 65% of sales came from Appen’s ‘content relevance’ service. Around 33% of sales were generated from language services.

While both segments are important to Appen, the content relevance service has driven growth over the last four years.

Appen annual report

Source: Appen annual report 2016, 2014

From 2014–16, Appen’s content relevance sales grew at a compounded annual rate of 17.8%. And with its latest acquisition, Appen could maintain this growth going forward.

Appen to Acquire Leapforce

Yesterday, Appen announced that it would acquire Leapforce for US$80 million.

Leapforce specialises in search relevance through its proprietary technology. Leapforce’s service is similar to Appen’s, which makes it a great bolt-on acquisition for Appen.

For the 12 months ending 31 December 2017, Leapforce expects to generate US$58 million in sales and US$13.6 million in earnings before interest, tax, depreciation and amortisation.

That means Appen could potentially boost content relevance sales to more than $149 million in FY18.

Appen has been in a trading halt since yesterday. My bet is that when the stock resumes trading, investors might bid the stock up even higher than its current price.

CEO Mark Brayan notes:

The acquisition of Leapforce is a compelling fit for Appen.

The combination adds scale and scope that will help us do more for our customers in the high growth artificial intelligence market. We are impressed with the calibre of Leapforce’s people, their strong customer relationships and purpose built technology platform.

Cheers,

Härje Ronngard,

Junior Analyst, Money Morning

PS: Want to find more small-caps like Appen that could potentially race higher in months? Check out what we believe are the top three small-cap stocks trading on the ASX right now.


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