Veritone Is Trading On AI Hype With 70% Downside

Veritone (VERI) is mostly a collection of low-quality acquisitions that the market has heaped value upon because of the AI hype around a business that makes up only 20% of the company’s revenue. The company currently trades at an enterprise value to revenue ratio of 7x 2020E revenue, a huge valuation for what is mostly an advertising business. For comparison’s sake, WPP and Interpublic, both much higher quality advertising businesses, trade at 1x revenue.

In August of 2018, Veritone acquired Performance Bridge, a small podcast advertising agency, for a total of $8.4 million including an earnout. Also in August 2018, Veritone purchased Wazee Digital, a content management company, for $12.5 million. Finally in September 2018, Veritone bought Machine Box, a machine learning company, for $4.5 million. These acquisitions took Veritone from $14 million in revenue in 2017 to $50 million in revenue in 2019. All else being equal, these purchases added $36 million in revenue to Veritone for a grand purchase price of $25 million, implying a revenue multiple of 25/36 = 0.7x, one tenth as much as the market is valuing the company today. Unless these companies were being highly irrational when they sold to Veritone, a 0.7x multiple for this part of the business seems fair.

So how about the juicy, AI SaaS part of the business? First let’s define what the business is. The company’s software uses a variety of other company’s AI algorithms to solve specific business problems. While there is some value here, the real value is in the AI algorithms themselves which are provided by IBM, Microsoft, Google, Amazon, etc. I believe that this is a niche business for Veritone. The larger markets will be targets for the AI vendors themselves, while Veritone will be left with the scraps. Veritone’s two markets currently are tagging content for radio and TV broadcasters and for the government, legal and compliance markets. These are not large markets for the type of work Veritone does in them and while they are not fully penetrated, I think they are bounded on the upside relative to the company’s market valuation.

So on a sum-of-the-parts valuation, the $40 million of advertising revenue that Veritone purchased for 0.7x sales is worth $28 million. The $10 million of “AI SaaS” revenue can be valued at 5x sales so it is worth $50 million. The company has $49 million in net cash on the balance sheet so the aggregate value is 28+50+49=$127 million or $4.70 per share, for 70% downside from current levels.

Disclosure: I am/we are short VERI.