2023-08-24 06:30:56 ET
Summary
- Veritone's share price has seen significant growth due to the popularity of its AI technology, particularly in the field of Generative AI, but the stock is now down.
- The company focuses on using AI to improve productivity and automate media workflows, with the potential for significant economic contributions.
- It faces competition in the AI market but has positioned itself as a comprehensive solution provider, handling complexity for customers.
- However, it has made a costly acquisition, consumes instead of generating cash in operations and is loss-making.
Veritone's ( VERI ) share price has benefited from AI transitioning from the confines of R&D departments to becoming more mainstream after Microsoft ( MSFT ) announced its investment in OpenAI's ChatGPT back in January of this year. From around $5 at that time, the shares appreciated by 100% to reach $10 implying that a lot of money had already been made on the stock as it is now hovering around $3. Now, for those who are either holding the stock and are wondering what to do next or are willing to invest at the current price, my objective with this thesis is to provide relevant insights.
For this purpose, I will venture into the product strategy while assessing whether it specifically has anything to do with Generative AI, the technology that is driving ChatGPT, not just machine language which has been around for years.
Using AI for Productivity Gains
First, looking at the business, this is an enterprise AI software and services provider as shown below, and has partnership agreements with some of the largest players in the industry like Microsoft (NASDAQ: MSFT ) and Accenture ( ACN ) while serving some big customers as pictured below.
However, when you go deeper through the company’s presentation slides and earnings transcript in order to have an idea of what it is that really drives the business, there is mention of Veritone’s operating system for AI called aiWARE used to integrate text audio and video through machine learning. This is basically about enabling companies to automate their media workflows using intelligent algorithms. In other words, this is about using AI models to optimize productivity to increase the content produced by an existing team of employees, or have fewer staff to do the same amount of work.
Now, this idea of AI improving productivity is also endorsed by two independent research firms, McKinsey and PricewaterhouseCoopers . While the first estimates that Generative AI could engender productivity gains of 24% over what is already awaited for the 2022-2040 period, the second goes a step further by providing an estimated $15.7 trillion of contributions from artificial intelligence to the global economy by 2030. This helps to bring some clarification for this much-hyped technology and also helps to show that this flavor of AI is not some nice-to-have application, but relates to productivity or improving the corporate bottom line. This in turn means that the company can benefit from traction for its products.
Product Positioning
However, with so many tech companies already reorienting their core competencies towards this flavor of AI and hundreds of startups joining the market as a result of venture capitalists pouring in more money, it is importa nt to at the way Veritone competes.
Thus, looking at product positioning, this is a company that has already been working with different content providers for transcripts and object detection purposes. Also, since its inception in 2024, it has gradually evolved its product suite as pictured below and in February this year introduced Veritone Generative AI to take advantage of corporate enthusiasm around the technology.
Consequently, it won an award at the Nabshow event held in April this year which brings together stakeholders in the broadcast, media, and entertainment industries and where the talk is normally about innovation in content creation. The award was in recognition of the ability of the company's generative AI for monetization purposes or to help clients extract value from existing repositories in order to drive new engagement and reach.
Noteworthily, this is not solely a software vendor focused on one aspect of AI, but rather Veritone differentiates itself using large language models for job-specific tasks using a normalized format that is easily understandable by customers. This means that they do not need to have deep expertise as Veritone handles the complexity for them.
The Revenues, Cash and Profitability
It is precisely because of its team performing tasks on behalf of clients which explains why nearly 50% of its revenues are skewed towards Managed Services in addition to Software as shown in the revenue summary part below.
However, the above also shows a sales decline of $6.2 million in the second quarter of 2023 (2Q23), which is due to 2Q22's revenues including a one-time software benefit from Amazon's ( AMZN ) AWS marketplace . However, Managed Services also declined due to unfavorable macros weighing on customers' advertising spend, which was offset to some extent by some contribution from the Broadbean acquisition which took effect on June 13. However, this acquisition has financial implications of $50.2 million for the balance sheet plus a further $10.5 million pertaining to previous M&A
This in turn reduced the cash in the balance sheet to $62.7 million from $139.7 million. Now the acquisition is accretive but given that instead of generating cash, Veritone has consumed $24.7 million and $33.8 million in operations during the last two quarters may have spooked risk-averse investors causing the stock to drop by around 10% when the deal was announced on May 31. The fear is that at this rate of consuming cash, not much would be left for operating purposes by early next year.
This is probably the reason for the company securing a revolving credit line of $30 million, but, if contracted, this facility would increase the debt level to $172.2 million from the $142.2 million already owed as of the end of June. Also, with a high debt-to-equity ratio of 3.625 (142.2/39.1), it is important for this loss-making company to optimize costs. In this respect, cost savings of over $17 million (annualized) have already been executed plus an additional $10 million earmarked which would include cost synergies from the Broadbean acquisition.
However, this appears relatively little when you consider the challenges to be faced throughout the remainder of this year. First, despite the U.S. economy showing resiliency and inflation having been lowered down, borrowing costs remain high in turn prompting Veritone's management to be conservative in its outlook. Thus, despite including Broadbean, 3Q23's topline guidance is estimated at $35.5 million to $37.5 million whose midpoint would represent a 2% decrease compared to the same period last year.
Additionally, there are also risks that this guidance be pressured by macros-led weakness in the advertising business as well as lower revenues from Amazon, while GRI or Government and Regulated Industries continue to see strength, but, not enough to make a difference. As a result, FY-2023 topline expectations have been trimmed to $132 million, which is down from $149.7 million of revenues obtained last year.
As for profitability, while the executives aim for profitable growth, its achievement appears to be slipping further away into 2024. The reason is that FY2023's non-GAAP net loss is now expected to be $30.5 million (midpoint) which is significantly higher than the $4 million (midpoint) initially forecasted in March during the 4Q22 earnings call . Furthermore, the $30.5 million represents a significant deterioration over the non-GAAP net loss for 2022 was $15.9 million.
Conclusion
In these circumstances, this is not a stock to buy even if after the downside valuations have come down and the stock’s P/S is trading at a discount of 71% with respect to the IT sector. Moreover, with a stock price that is well below the 50-day SMA and 100-day SMA, momentum indicators show that the downside could continue. For this matter, after falling below the $4 level, the next resistance level could be $2.10, last reached in March 2020, which in turn implies that it is better to sell.
Still, for those eying the stock, there may be opportunities over the longer term.
First, Broadbean which specializes in SaaS technology for talent acquisition brings over $30 million of ARR (average recurring revenues). Together with Broadbean Veritone now has a combined ARR of $100 million, and considering that this year's revenues are projected at $132 million, this means that 75.7% of revenues are recurring in nature which is above the typical 20%-50% for SaaS companies.
Second, despite the dollar value of new bookings decreasing sequentially, they still stood at $8.4 million at the end of the second quarter. Third, Broadbean was focusing mainly on customer retention during the last 18 months at the expense of acquiring new ones, but it still managed to grow revenues slightly by $0.2 million. Now, without this constraint, it could beat the $8.5 million to $9.0 million revenue expected for 3Q23.
Fourth, there was a divestiture away from the energy business and revenue is being diversified to reduce dependency on Amazon.
Therefore, there are opportunities but it is best to wait for clear signs of improvement in revenues, profitability, and cash position before investing.
In conclusion, this thesis has shown that Veritone is no opportunistic buy despite some appealing AI products. Moreover, some of the recent upside experienced by the stock was triggered by the frenzy around Nvidia's financial results on August 24.
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For further details see:
Veritone: Appealing AI Product But Finances Have Deteriorated