Big tech’s pursuit of artificial intelligence hit turbulence last year when reports emerged of Google partnering with the US Department of Defence.
Code-named Project Maven, it involved developing a program that would help analyse thousands of hours of drone footage without the current level of human intervention. Computers would do the grunt work and humans would be able to focus on the higher-level analysis – like picking potential strike targets.
It caused a ruckus among Google employees over the potential weaponisation of AI, and the protests forced the search giant to announce in June this year that it would not renew the contract.
But the people doing the work on behalf of Google may have been blissfully unaware of their role in potentially weaponising AI for the Pentagon. And many would have been foreigners to boot.
In 2017, Google hired a company called CrowdFlower – a crowdsourcing platform with hundreds of thousands of gig economy workers – to process and label the images provided by the Pentagon.
These workers would perform the millions of micro tasks that would help identify a building in a photo or a car. This information would then be formatted into data sets that would then be fed into the program.
It is a practice called machine learning, a subset of AI that involves teaching computers skills as diverse as how to distinguish between high heels and hiking boots and how to recognise a vocal request to order pizza.
It requires a small army of helpers to train computers by feeding them millions of examples of data to help the machines learn and, in the case of the Pentagon’s Project Maven, potentially determine friend from foe.
By the time the controversy erupted, CrowdFlower had changed its name to Figure 8.
In March this year, the loss-making Figure 8 found a buyer with deep pockets willing to pay up to $US300 million ($440 million) for the business. That business was one of the hottest tech stocks on the ASX: Appen.
The issue is that Appen is a labour arbitrage business and very manual, it’s not really artificial intelligence.Montgomery Investment Management chief investment officer Roger Montgomery
While Afterpay and Atlassian grab headlines with their rich-list founders, Appen has also soared to stratospheric valuations on the back of its cachet as a company exposed to the burgeoning AI space.
The stake of founder Dr Julie Vonwiller and her husband Chris Vonwiller – who is also the chairman of Appen – is currently worth more than $250 million.
After upgrading its earnings outlook for the third time this year, Appen is trading at about 50 times forecast earnings.
Tech stock or not?
But as the role of Figure 8 indicates, the story of Appen’s success as a player in the AI space is not as simple as the world domination plans of its brethren WAAAX stocks: WiseTech Global, Atlassian, Altium and Xero.
In fact, some sceptics question whether it is a tech stock at all.
Roger Montgomery of Montgomery Investment Management has labelled it a low-tech business feeding the machines of high-tech customers.
“The issue is that Appen is a labour arbitrage business and very manual, it’s not really artificial intelligence. But it has recently been priced like an IT business,” said Mr Montgomery, who has been a sceptic of some of Australia’s tech high-flyers.
But unlike some of its fellow WAAAX stocks, Appen has strong profits to match its strong revenue growth.
For the half-year ending June 30, revenue increased 60 per cent to $245 million while net profit was up 32 per cent to $18.6 million.
But its accounts highlight some of Mr Montgomery’s concerns.
Appen has more than 1 million gig economy workers on its books who are actually doing the data annotation work which is the engine of its revenue and earnings growth.
According to Appen’s accounts, for the six months to June 30 its biggest expense item is the money it pays this army of casual workers around the globe. But they were paid just over $145 million for the period – equating to $145 each for the half year.
I think the opportunity is very substantial given the AI arms race between the tech giants.Wilson Asset Management portfolio manager Tobias Yao
Its next biggest expense was the cost of its 600-plus permanent employees. They took home more than $42 million in pay and equity over the same period.
Research and development costs didn’t even get a mention.
Its fans say it is the company’s platform, which connects its gig economy workforce with the customers who use the service, that is the core of the company. Whether the company is an AI player or not misses the point.
“Appen’s competitive advantage is the level of automation within its technology platform which increases productivity and improves the quality of data,” said Wilson Asset Management portfolio manager Tobias Yao.
The 2018 annual report highlighted the company’s “strategic imperative of investing in new technology to reduce costs, improve margins and sharpen responsiveness to evolving customer requirements”.
So the message is that it has the best platform for marrying cheap casual labour to the grunt end of the AI industry and, as Appen’s chief executive Mark Brayan makes clear, AI is unambiguously the next big thing in tech.
The trillion-dollar giants such as Google, Apple and Amazon are the main players in this expensive gold rush and Appen wants to be the company that sells them the picks and shovels at a price and with a level of service that remains ahead of its rivals in the space.
“There’s plenty of folks that look at our business and say, surely they are not going to need that in a few years, and I tell you they are so wrong,” said Mr Brayan.
The people leading the AI efforts at its big tech clients can’t see an end to their data and data labelling needs, he noted.
“It’s a profound shift and, as you say, we’re selling picks and shovels to a gold rush that nobody can see the end of and it’s a great place to be.”
This view finds backers among investment professionals such as Wilson Asset Management’s Mr Yao.
“It’s exposed to the right macro trend,” he says.
“I think the opportunity is very substantial given the AI arms race between the tech giants. Appen’s growth is driven by these customers investing in search relevance, speech recognition and driverless vehicles to name a few examples.”
RBC analyst Garry Sherriff also believes Appen is ready to catch a big wave in tech spending.
“We believe the demand for annotated and curated data for machine learning and AI purposes is in its infancy,” he says.
He cited McKinsey forecasts that the market will be worth up to $191 billion by 2025 and grow at a compound rate of over 50 per cent for the medium term.
Around 10 per cent of this spend is in Appen’s arena of data labelling, giving it an addressable market of $19 billion by 2025, said RBC.
The problem is, what happens when AI gets more intelligent and no longer needs an army of cheap labour to underpin its machine learning?
In more practical terms it means what happens when the deep pockets of Google, Amazon and Microsoft – and AI advances – find it more practicable to cut Appen out of the equation?
“If Appen can do it, they can do it. So when do we get to the point where the business proposition of Appen is threatened and that’s my question,” said Mr Montgomery.
“I could be completely wrong but the risk of that means I want to avoid paying those absurd multiples for this particular business,” he noted.
Mr Brayan agrees with the thesis that the fully human-based data labelling will get “disrupted”, but he says that Appen is already jumping on this trend with acquisitions, like Figure 8, which possesses technology that already supplements the work by people.
“But I also think that AI is going to continue to require vast volumes of human-quality data,” he said.
“So our business has a solid future but we are going to have to serve that demand in a different way through a combination of humans and technology.”
Mr Yao is a bit more cautious on this potential disruption to Appen’s business by AI itself.
“The difficulty is figuring out when is that inflection point and I don’t think it’s anytime soon,” he noted.
Another concern is Appen’s dependence on its big customers. More than 80 per cent of its revenue came from just five customers prior to its acquisition of the Leapforce business in 2017.
“The two key pushbacks are valuation and the lack of visibility around how the customers are actually allocating work,” said Mr Yao.
But he thinks this is where Appen’s ability to keep ahead of the crowdsourcing competition is key.
“In response to that, we believe that if Appen can lead its competitors on the scale and technology fronts, it will get its fair share of the overall market growth over the next few years.”
Source: Thanks smh.com