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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

Marketplace Growth Isn’t Enough for This AI Company

While Veritone showed impressive AI market place growth, it’s doesn’t have the tools to compete with big tech

Veritone (NASDAQ:VERI) reported the results of its first quarter last week, beating on revenue while missing the earnings per share consensus.

Revenue came in at $4.38 million, translating into 40.4% year-over-year growth. Analysts were modeling for $3.96 million in revenue. Earnings per share fell short of expectations as the company reported a net loss of 8 cents a share. The company is targeting to add 15 more customers to its AI platform during the second quarter, up 21% sequentially. The market reacted positively and the stock was up 17% after the earnings release.

AI marketplace helped revenue growth

Revenue growth was supported by the AI business of Veritone, which was up more than five fold during the quarter. Revenue from the AI platform – a pool of AI engines from different providers for audio and video transcription, face-recognition and object-recognition – crossed the $1 million mark during the quarter to reach $1.2 million. Most of the growth in AI revenue came from the legal vertical, according to the management. Moreover, media revenue was up around 7% during the quarter.

The number of customers on AI platform increased 180% year-over-year to reach a total of 70 customers. It is worth mentioning that the number of third-party cognitive engines increased approximately 53% to reach a total of 184 during the trailing six months or so.

Forward guidance indicates slowdown in growth

For the next quarter, Veritone is guiding to add 15 more customers translating into an annual addition of 60 new customers. This will bring the growth down to approximately 85% during the next year, which is not short of impressive though. Nonetheless, the growth forecast is lower as compared to the growth in the current quarter.


*First quarter 2019 growth is extrapolated from Veritone’s second quarter guidance that is the company adds 15 customers during the second quarter of 2018.

It is worth mentioning that the company increased its revenue 40% year-over-year backed by more than 180% growth in customers during the first quarter of 2018. It follows that the company will be able to more than double its AI revenue during the first quarter of 2019, if customer-to-revenue ratio holds. Total revenue, during first quarter 2019, could look like this:


Notes to the table: Media agency revenue is forecasted based on the historical growth. AI revenue is esitamated based on the company's guindance for customer addtion during the next next quarter assuming that the company continues to add the similar number of customers during each of the next four quarters.

Analyst consensus for 2019 is quite optimistic

The chart above shows that Veritone can increase its year-over-year revenue by 44% during the first quarter of 2019. Analysts, however, are expecting 100% year-over-year growth during 2019. Slowing growth of AI customer-uptake is expected to drag down revenue consensus going forward. In short, the analyst consensus is quite optimistic.

The problem is that despite optimistic analyst consensus, Veritone is trading at a very high price-sales ratio.

The stock supports a price-sales ratio of around 16 based on 2018 earnings. The ratio comes down to around 8 based on 2019 sales. But, as mentioned above, 2019 sales consensus is a highly unlikely feat, as the growth will be slower next year.

Veritone isn’t actually an AI company

Part of the reason that Veritone is priced expensively is that the management claims it to be an AI company. Although true to some extent, Veritone is actually an analytics company that uses audio and video search to present actionable data to clients. Note that the company generated substantial revenue from legal vertical during the first quarter; clients benefit from audio and video search feature. “Our technology helps law firms lower cost by finding the right audio, video, and text evidence hidden among a virtual warehouse of information much more quickly and effectively than other methods,” said the CEO on the earnings conference call.

The patent landscape also provides evidence of the weak position of Veritone in the AI space. The company holds around 14 patents relating to natural language processing (NLP), which is in stark contrast to more than 5000 NLP patents held by Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM).

The only AI-related exposure for the company is its AI marketplace that serves as a converging point for third-party engines. In short, Veritone shouldn’t be confused for an AI pure-play, or valued like one.

The point to understand is that Veritone is not an AI pure-play. It actually has an AI market place with a promising engine-pooling software, and the company offers audio and video search analytics. Therefore, it should be treated as a niche player instead of compared to AI companies. Most of the AI talent resides at big tech companies including Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

Then, there’s competition

Given the resources at the disposal of big technology companies, competitive threat in the AI space is very real. The transcription business of Veritone faces competition from many big players. For Instance, Amazon’s Lex, a part of Amazon’s machine learning tools, supports object and facial recognition, person tracking, facial analysis and text extraction, etc. Further, in the AI marketplace, Veritone can face competition from the likes of Microsoft and IBM. Smaller players like Algoritmia might also pose a threat in the near future.

Takeaway

The bottom line is that Veritone is a risky bet for investors looking to capitalize on the growth prospects of AI. Veritone is operating in a niche market, with an AI platform that can fall victim to AI solutions from big tech going forward.

Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

Visit Soid Ahmad's Website


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