2023-05-08 21:24:33 ET
Summary
- Shares of Veritone, already down more than 25% year to date, tumbled after its early-May earnings release.
- Veritone's concentration to Amazon continued to hurt the company, as Amazon-driven revenue declined -49% y/y in the first quarter.
- Total revenue also declined -12% y/y, which is a bad look for a company purporting to be an AI visionary.
- With just over $100 million in balance sheet cash and a tendency to burn cash, Veritone looks like an unsafe bet.
Here's the thing about recessions: often, tough macroeconomic times prove to be the separator between weak companies and strong. During times of optimism and easy money, small-cap stocks that peddle strong growth stories may be able to stay afloat, but when capital gets hard to come by and investors look for proof of strength in fundamental results, these companies will start sinking.
Veritone ( VERI ), in my view, is a company that has held on to its lifeline for too long. This self-purported AI operating system company has struggled to maintain relevance among a star-studded competitive field (especially now as mainstream companies are all investing in AI), and its lackluster results are starting to draw the ire of investors. Down ~25% year to date, Veritone is also off more than 90% from its 2021 peaks - and in my view, there is little to no chance of recovery.
I remain bearish on Veritone for a number of reasons:
- Veritone plays in an increasingly competitive market for AI. Veritone's so-called operating system basically helps companies build AI applications on top of other companies' AI engines (think IBM Watson). The problem here is that there are other companies that do this that have much better branding, such as C3.ai ( AI ). And that's not to mention the fact that the popularity of ChatGPT has kicked off a recession-era arms race for AI development among the large tech powerhouses.
- Amazon customer concentration. Last year (FY22), nearly half of Veritone's revenue came from Amazon, particularly the company's hiring solutions products. Amid budget cuts, this revenue is being dramatically slashed.
- Limited resources. Veritone has limited cash on its balance sheet and after accounting for its debt, is a rare small-cap tech stock that is in a net cash zero position. Considering how tight the capital markets are right now and given the fact that Veritone continues to burn cash, the company is in a precarious situation.
Of course, some may point to the fact that Veritone is cheap. At current share prices sitting just under $4, Veritone trades at a market cap of just $141.8 million. After netting off the $139.7 million of cash and $138.0 million of convertible debt on Veritone's most recent balance sheet, the company's resulting enterprise value is $140.1 million.
For the current fiscal year, Wall Street analysts are expecting $156.0 million in revenue (data from Yahoo Finance ), representing 4% y/y growth - a target I'd consider to be aggressive considering the continued headwind from Amazon and the revenue compression evident in Q1. Nevertheless, taking this estimate at face value Veritone trades at less than <1x forward revenue.
This being said - I don't see any drivers for Veritone to recharge its growth or suddenly get on track toward profitability. Cost-cutting efforts may help stave off the need to raise capital in the near term, but it won't be enough if Veritone's top line keeps shrinking.
The bottom line here: Veritone is cheap for a reason. Especially in a high interest rate environment, there is far more risk associated with investing in this stock than potential upside; steer clear here and invest elsewhere.
Q1 download
Let's now cover Veritone's latest quarterly results in greater detail. The Q1 earnings summary is shown below:
Veritone's revenue declined -12% y/y to $30.3 million, a slight beat versus consensus expectations of $29.9 million (-13% y/y).
The main headwind here was Veritone's AI-based hiring solutions, which the company described as returning to pre-pandemic levels. Amazon was the big player here, and Amazon-driven revenue declined by a massive -49% y/y : giving Amazon an 18% revenue mix of the company's overall top line, down from 31% in the year-ago Q1. The good news here is that Amazon won't be a sustained headwind as it continues to fade out of the prior-year comp (Amazon revenue started shrinking in the back half of 2022); the bad news is that Veritone is unlikely to land another massive customer to replace this revenue.
And although the company did not mention any macro impacts on its business during the Q1 earnings call as many other tech companies have, we have to note that AI-type investments are long-term capital projects that are going to get delayed in this budget-cutting environment.
Here is what Veritone management has in mind as top focus areas for 2023, per CEO Ryan Steelberg's remarks on the Q1 earnings call :
First is focused execution. Veritone continues to pursue existing markets where we have established clear differentiation and product market fit, resulting in disruptive efficiency and productivity gains delivered to our customers. Integration of our various applications, enabled through aiWARE, offers orchestrated cognitive and generative AI workflows and solutions transforming the verticals we know best, Talent acquisition, media and entertainment, sports and government-regulated industries. These are all verticals where we are seeing increased AI adoption with large runways for tremendous growth.
Second, operational excellence. During 2023, Veritone has already implemented a number of organizational initiatives to reshape the company and more efficiently support the needs of our customers. Together with the executive leadership team, we are pursuing the highest level of excellence in everything we do, from hiring to employee engagement, and of course, product development and sales. The entire Veritone team is doing their part.
Lastly, fiscal responsibility. As we drive Veritone towards profitable growth in the upcoming year, I'd like to reiterate the initiatives we announced earlier this year, which include a target of $12 million to $15 million of annualized cost savings. I am pleased to report that Veritone remains on track to achieve the target range, reinforcing management's commitment to right size our cost structure and optimize the balance sheet."
One other top-line metric worth calling out: new bookings grew 57% y/y to $15.0 million. However, rather than being impressed by the growth figure, I'd say this is more likely due to a depressed Q1'22 comp - as $15 million represents barely half a quarter's worth of revenue, when a booking metric is supposed to capture multiple quarters of deal volume. It's hard to say how this bookings level will support consensus expectations for 4% y/y revenue growth in FY23.
Lastly, investors should keep a close eye on Veritone's cash burn, as operating cash flow touched -$33.8 million for the quarter:
With only ~$130 million of cash left on its balance sheet (and all of that being netted off by convertible debt), Veritone doesn't have much time or room left to accelerate its path to profitability (and against this burn rate, the company's plan to save $12-$15 million a year on opex, especially if the top line keeps shrinking, won't help all too much).
Key takeaways
With poor revenue performance, a relatively shoddy brand that competes against much more powerful AI companies, and weak profitability on top of a crunched balance sheet, there's not much incentive to staying invested in Veritone stock. Steer clear here.
For further details see:
Veritone: More Risk Than Reward