At time of writing, the share price of Appen Ltd [ASX:APX] is up 1.33%, trading at $20.26.
The Appen share price is stuck in a downtrend over the last three months — from a high of $32 on 30 July, it has shed around 37%:
We look at three reasons that APX shares have been going down with an eye on their future prospects and when a buying opportunity might be.
Reason #1: Appen share price is up over 500% in less than three years
Sometimes it’s as simple as profit taking. With the Appen share price up more than 500% in less than three years, it makes sense for some investors to exit the investment.
Even if you had bought in early last year, your Appen shares would still be up more than double.
Reason #2: Appen is trading at a relatively high P/E
There are rumblings of a return to value investing showing up in the pages of the AFR.
This is where investors go hunting for stocks trading below their intrinsic/book value based on fundamentals.
For this reason, with Appen trading at a price to earnings (P/E) ratio of around 47, this may be putting some people off.
It’s not all that bad for a tech stock (Appen does a lot of the human work necessary to build AI applications), but it could be a factor.
According to Market Screener, for 2020 they have a forward P/E of 35.2 according to analyst estimates.
So they are expected to perform better in the coming year.
Reason #3: Momentum is hard to stop
From its high at the end of June there was a big spike at the end of August, but the moving average lines on the above chart point to there being a significant amount of momentum behind the downtrend.
Think of it a bit like physics — it’s harder to brake your car when you are hurtling down hill.
But Appen remains a significant player in the AI space and money is flowing into this sector, so you would expect the momentum to eventually reverse.
You can see in the chart below a potential buying opportunity based on trend lines:
If it can find support around the level at which it broke out in late February — momentum could shift.
Alternatively it could fall as low as support around $12, but this seems unlikely.
It’s just an idea, but one worth considering if you are looking at an Appen investment.
We cover Appen and three more ASX-listed AI stocks in greater detail in this report.
For Money Morning