I think small caps will be a great momentum trade for the rest of 2024, particularly when rate cut begin. Veritone is my favorite one in the category right now.
I think this is one to ride the momentum until price corrects. I see 100-500% upside in the next 12-18 months.
Veritone—Big Upside in AI and Macros
Investment Thesis
Veritone is a small-cap artificial intelligence company trading at a significant discount to the sector.
Customer concentration risk hid the underlying growth story and has now been solved.
Fundamentals are improving,
Veritone’s AI products have large growth runways in media and entertainment, public safety, and recruitment.
Macro-economic trends post-pandemic favored profitable large-cap companies but will shift into small-caps in the second half of 2024.
Veritone has more than 100% upside over the next 12 months as revenue re-accelerates, small caps take the lead, and profitability is realized through diversified revenue growth.
Customer Concentration and Recruitment
In 2021 Amazon contributed 40% of Veritone’s revenue-- in 2024 they will contribute less than 5%.
When you remove Amazon’s revenue from the mix, you can see a rapidly growing small-cap company, surviving a difficult transition in 2023, and re-accelerating from a stronger base in 2024 and beyond.
In Q4 of 2023 revenue, excluding Amazon, grew 64% YoY , a good sign for re-
acceleration into the new year.
Veritone Amazon Revenue Breakdown Rev. Amazon% Excluding Amazon Growth
2021 115M 40% 69M
2022 149M 25%. 113M 63%
2023 128M 11% 113M 0%
2024 142M 5% 135M 19%
Amazon’s revenue comes from Veritone’s AI Hiring tool. Amazon, along with many large tech companies hired large numbers of employees after the pandemic—and announced significant lay-offs as the economy cooled and fed rates increased.
The impact on Veritone’s revenue is visible in the table above.
AI tools for hiring are still in their earliest stages, with about 12% of employers utilizing them, including Microsoft and Amazon paving the way; this industry has a lot of growth opportunity ahead and will remain relevant for many decades to come. One survey revealed 43% of employers plan to implement AI into their hiring process over the next year.
There are many use-cases for AI to
streamline hiring and Veritone is set to benefit from them; having Amazon as a large customer gives Veritone credibility and an edge on the competition.
Media & Entertainment
Artificial Intelligence is re-shaping the media and entertainment landscape, with the ability to generate realistic voice, likenesses, environments, and effects undetectable to the viewer. Veritone
provides leading generative AI deepfake technology already in use in media, entertainment, and advertising**. Deepfake technology is growing remarkably fast with a broadening revenue base; its**
market is expected to grow from $7-billion in 2024 to $38.5-billion in 2030— a CAGR of 33.5%.
AI is already used for marketing in over 60% of businesses it has an expected CAGR of nearly 27% as the technology continues to improve.
Despite a squeeze on spending in 2023, Veritone managed to add new customers to its media and advertising suites, including Fox Corporation, CAA and ABC TV, Sesame Street, the Football
Association, World Poker Tour, Major League Baseball, and the Women’s Tennis Association.
All in all, Veritone’s digital media products grew 43% YoY in 2023.
Public Safety
Veritone’s “Public Sector” products include a suite of AI-tools for Law enforcement and government
agencies. These tools include AI-powered information gathering and detection, evidence management, identification, tracking, and redaction tools to cleanly and efficiently redact evidence for release.
AI technology is changing law enforcement and public safety around the world, from evidence collection and processing, to suspect identification and report-writing that better stands up in
court—The market is ripe for growth as AI tools provide efficiencies and cost-savings never before realized.
Public safety and security AI spending is projected to increase from $9.33-Billion in 2022 to $71-Billion in 2030—a CAGR of 29.3%.
Veritone’s Public Safety growth is hidden amongst earnings reports marred by Amazon revenue declines but has been growing materially for several years.
In 2022 Veritone had roughly 100 law
enforcement agencies using their products and added 87 new agencies in 2023. Revenue growth for Veritone’s Public Sector AI tools grew 55% YoY and 29% sequentially, marking further acceleration in this market and Veritone’s ability to win contracts versus competitors.
In the Q4 of 2023 Veritone
was awarded a $15-million DOJ blanket purchase agreement to provide its AI powered public sector tools to government agencies. This is a multi-year deal which I expect to nearly double Veritone’s 2023 public sector revenue of $6.1-million.
Macro-Economic Tailwinds
Veritone will benefit from three major macro-economic tailwinds in 2024 and 2025. Pre-profit companies have largely been scorned by investors over the past two years as economic uncertainty
demanded stable finances for investor dollars.
Veritone’s improving fundamentals are already being rewarded as evidenced by a quant upgrade and a significant increase in trading volumes from 500k shares per day to 5-10million (!) following earnings, indicating a lot of new investor dollars moving in.
The second major tailwind is the most obvious—Artificial Intelligence. The Generative AI market is projected to grow at a CAGR of 42% over the next 10 years, and Veritone is one of only a few value names in the AI space, despite recognition for its Generative AI platform.
Veritone is positioned to be a successful competitor in the rapidly growing AI marketplace with a meaningful product
pipeline.
Tailwind three is the very macro-environment that punished Veritone so severely over the past two years while money moved into large cap names and small caps fell out of favor. The major indices have repeatedly made new highs, while small caps have lagged. Small cap stocks are now trading at their best values since the pandemic. Analyst Tom Lee with Fundstrat even called for a potential 50% run in small caps in 2024, and many analysts are calling for small caps to outperform large caps for the remainder of 2024.
In short, Veritone will experience material share price appreciation in 2024 due to the market-broadening into small caps, revenue growth into profitability, and AI market expansion.
Valuation
Veritone competes with several artificial intelligence peers to use for comps.
Veritone Voice is a legacy offering used in the media and advertising space and competes with SoundHound (SOUN).
Veritone is a leader in synthetic voice tools and continues to expand this
product capability in concert with its AI chatbox and conversational technology.
Veritone’s adtech competes with AI products offered by Perion (PERI) and The Trade Desk (TTD).
Other AI sector comps include C3.ai (AI), and Palantir (PLTR). Veritone sold off its energy asset technology that competed with C3.ai, and while it is a small fry in a big pond, its Public Sector business crosses into the government contract realm of Palantir.
The chart below illustrates valuations for the listed comps. All of these companies have gross margins in the 60-80% range except Perion which has a gross margin of 37% and is based in Israel with its own set of macro-economics materially undervaluing it relative to high-margin peers.
For a side-by-side comparison refer to the table below.
Ticker PERI AI SOUN PLTR TTD VERI
P/S 1.4 11 40 23 19 1.5
EV/S 0.7 9 36 18 15 1.8
The IT sector median trades roughly 3x Veritone’s current valuation, and the median premium for high margin AI companies is roughly 12x the current valuation.
Until Veritone reaches profitability, I believe 3x sales should be a floor value for Veritone, with a fair value in the 6-8x range.
This places a floor share price for Veritone at $9, and a fair market price at $21, which would put Veritone’s market cap around $790M.
For further reference to the above comps, SoundHound’s 2024 revenue estimate is $70M, which is almost exactly half of Veritone’s. SoundHound has better financials, and a higher growth rate at nearly 50%, but slightly lower gross margins. I believe these companies are good comps.
It will take 3 years of maintaining 50% growth for SOUN to match Veritone’s 2024 revenues.
Soundhound’s market cap is $2.5 billion. Soundhound is a strong sell for me, and Veritone is a strong buy at these levels.
