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Appen share price slides 8% lower: Is this a buying opportunity?

James Mickleboro
Appen shares

The market selloff on Thursday due to U.S. recession fears weighed heavily on the tech sector and particularly the Appen Ltd (ASX: APX) share price.

The shares of the global leader in the development of high quality, human-annotated training data for machine learning and artificial intelligence dropped a sizeable 8% to $23.90.

This latest decline means that Appen’s shares have now lost 25% of their value since peaking at $32.00 in July. Though it is worth noting that they are still up 87% since the start of the year.

Is this a buying opportunity?

Whilst it might be prudent to wait for market volatility to subside, I believe this pullback in its share price has created a buying opportunity for investors that are prepared to make a long term investment.

This is because I believe Appen is well-positioned to grow its earnings at a strong rate for many years to come thanks to the explosive growth of machine learning and artificial intelligence.

A recent presentation by the company reveals that the AI market is expected to grow to be worth between US$169 billion and US$191 billion per annum by 2025. And with data labelling accounting for 10% of this massive market, Appen looks set to benefit greatly thanks to its leadership position in the lucrative market.

But there are risks, of course. Appen’s shares are currently changing hands at 52x estimated FY 2019 earnings and 40x estimated FY 2020 earnings.

This means its shares are likely to be hit hard (just like yesterday) when market volatility increases or if its earnings growth falls short of the market’s lofty expectations.

However, overall, I believe the risk/reward on offer from a long term investment is compelling and would class its shares as a buy along with fellow tech stars Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO).

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium and Xero. The Motley Fool Australia owns shares of Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019