Appen Limited (ASX:APX) Looks Inexpensive After Falling 28% But Perhaps Not Attractive Enough

Explore Appen's Fair Values from the Community and select yours

Appen Limited (ASX:APX) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

Since its price has dipped substantially, Appen's price-to-sales (or "P/S") ratio of 0.6x might make it look like a buy right now compared to the IT industry in Australia, where around half of the companies have P/S ratios above 1.4x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Appen

What Does Appen's P/S Mean For Shareholders?

Appen hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Want the full picture on analyst estimates for the company? Then our free report on Appen will help you uncover what's on the horizon.

How Is Appen's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Appen's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. As a result, revenue from three years ago have also fallen 47% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 8.2% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 24% each year, which is noticeably more attractive.

With this information, we can see why Appen is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Appen's P/S Mean For Investors?

Appen's recently weak share price has pulled its P/S back below other IT companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Appen's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Appen, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.