Veritone Inc. (VERI, Financial), an audio and video search company, has been in the news lately due to Andrew Left’s comment on the company’s future prospects. Left, the CEO of Citron Research, thinks the company is grossly overvalued, which was reflected in his recent tweet about Veritone.
Chad Steelberg, the CEO of Veritone, defended the company citing the infancy of artificial intelligence understanding. “Artificial intelligence is a new category for investors. People are still trying to grasp the impact of it, and of what we’re doing,” said Steelberg. Nonetheless, the stock is down 44% since Left’s comments.
Left is not convinced by Veritone’s prospects probably because of valuation that is disproportionate to fundamentals. His comments also reflect the lack of confidence he has in Veritone’s AI. Veritone, on the other hand, thinks investors don’t yet understand their AI business.
The thing is that Citron Research is a short seller while the CEO of Veritone can’t speak negatively about the company in the press. So there’s a hint of conflict of interest and lack of objectivity in the opinions of both these CEOs. Let’s try to be objective.
Veritone has little AI presence yet
According to Steelberg, they’re an AI company. But is that really the case? Facts point to the contrary. The company generates most of its revenue from the media agency segment. During the first half of 2017, the company generated $6.63 million in revenue from media agency segment.
Just to be clear, the company’s media agency business includes media planning and strategy, media buying and placement, campaign messaging, clearance verification and attribution and custom analytics. The extent of AI in the media business might just be limited to custom analytics. Anyhow, the company's AI segment made up only around 7.7% of the total revenue during the first half of 2017.
On the AI front, the company’s presence is in the search-based machine learning and content analytics, which is not expected to grow as fast as the overall AI market. Content analytics and CRM analytic applications will see a CAGR of 18.5% and 10.4% during 2016-2020 as corporations try to expand their big data and analytic activities, said International Data Corp. (IDC).
Moreover, IDC didn’t include Veritone in it cognitive and AI software platform forecast, which is indicative of insignificant presence of Veritone in that area. Overall, it seems like the company is not a dominating player in the AI arena.
The company doesn’t have key AI patents
Veritone’s patent activity has slowed down. See the chart below:
As artificial intelligence is on the rise, declining patent activity doesn’t bode well for Veritone. Moreover, the company doesn’t hold key artificial intelligence patents. It has some patents in the family of natural language processing, including "Engine, System And Method Of Providing Audio Transcriptions For Use In Content Resources." But this is just audio transcription. The company also has some user interface patents for multivariate audio and video search. Veritone has a patented platform for audio and video search.
Nonetheless, the company doesn’t have published patents for the services like object recognition, face recognition and sentiment analysis. This can only mean that Veritone outsources those services from some other AI players.
To review, the company holds patents related to audio transcription and search platform for audio and video, which doesn’t exactly make it an AI or cognition company.
There’s some reality to Veritone’s AI claims
The company says it provides transcription, face recognition, object recognition, AV tagging, translations, geolocation, optical-character recognition and logo recognition services. The company can still provide these services without key patents. It can license the technology, or simply outsource the task. It’s not wrong to say that the company operates in the AI arena.
And the company does have an AI platform
Veritone is developing a platform, like a marketplace, for developers to offer their AI engines. Veritone will act as a platform for developers and users of AI engines. It offers a technology, Conductor, which can match the uploaded media to a suitable AI engine.
Source: Veritone
In simple terms, clients’ data will be matched to a suitable AI engine through Veritone’s platform. However, the success depends on the uniqueness of the platform and how developers and AI users adopt the platform.
In the absence of patent protection, big AI players like International Business Machines (IBM, Financial) can easily replicate the platform, and blue-chip companies already have access to countless developers. So they won’t have to do a lot to populate the platform.
Veritone’s platform is still in its infancy, and it’s not that Veritone is the first company to have an AI marketplace. All the big guns of technology are toying with the idea of an AI marketplace.
Algorithmia, an open market for algorithms, already has some deep learning algorithms for face recognition and character recognition. Salesforce.com Inc. (CRM, Financial) also offers tools to integrate deep learning into applications. Google (GOOG, Financial) also offers a powerful Cloud AI that includes large scale AI services, video analysis, image analysis and speech analysis. H2o.io is an open source AI platform that offers machine learning solutions. Veritone’s platform is a bit different from other providers as it can match the data from users to a suitable engine from its database.
But there’s emerging blockchain competition
Hanson Robotics, in collaboration with others, is working on a concept, codenamed SingularityNET, involving blockchain marketplace for AI developers. Although blockchain technology is in its early years, the need for a centralized AI marketplace will vanish if the project pans out. According to Hanson Robotics' chief scientist, Ben Goertzel,
"It's a decentralized, open market for AIs in the cloud so anyone who develops an AI can put it into the SingularityNET, wrap it in our cryptocurrency-based smart contract and then the AI they put there can help to serve the intelligence of robots like Sophia or any other robots or any software programs that need AI."
Overall, Veritone has to prove itself as a unique marketplace as there are already many players with AI marketplaces.
So what’s the thesis here?
Veritone isn’t a pure-play AI as the company has heavy presence in media and advertising analytics. It also doesn’t hold key AI or cognition patents, which will make it difficult for the company to compete in the AI arena.
As the company uses AI terminology in its investor communication, the market has been valuing it as an AI play since its IPO. Veritone is, in fact, a media analytics company with audio and video search capabilities. It shouldn’t be valued as a pure-play AI.
The company does have a platform, or a marketplace, for AI. But there are also other platforms with similar capabilities. The company can’t match Google’s machine learning capabilities just yet. Blockchain might prove to be the industry standard. Further, AI is not simple. The engines on a given platform have to be trained, through ingesting data, in order to be useful. Veritone doesn’t have the scale of big corporations that can train their AI engines better.
Valuation isn't quite favorable. The company has a price-sales (P/S) ratio of more than 50 while the AI platforms are set to grow at around 40%. Cognitive and AI platforms are expected to witness a CAGR of 39% during 2017-2021, forecasts IDC. A P/S higher than industry growth is quite alarming.
All in all, the market is ignoring the extent of competition risk Veritone has in the “AI marketplace” space. The company doesn’t have enough patents to increase the barriers to entry. The bottom line is investors should stay away from Veritone amid the minimal presence of Veritone in AI, potential competition in the AI platform category and high valuation of the company.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
