Concentrated Customers And AI Margin Pressure Will Yield Cautious Recovery

Key Takeaways

• Heavy dependence on a few major customers and financial fragility threaten Veritone's revenue stability, margin improvement, and ability to fund future growth.
  
• Rising AI commoditization, regulatory compliance costs, and macroeconomic pressures could erode pricing power and hinder the company's expansion in high-growth markets.
  
• Persistent losses, margin pressures, reliance on large contracts, intense competition, and macroeconomic headwinds threaten Veritone's profitability, stability, and future revenue growth.

Catalysts

Engages in the provision of artificial intelligence (AI) computing solutions and services in the United States, the United Kingdom, France, Australia, Israel, and India.

• While Veritone's rapid expansion in its AI-powered software revenue streams-particularly the Veritone Data Refinery (VDR) and Public Sector contracts-signals strong alignment with the growing demand for AI-powered solutions and regulatory data requirements, this growth is presently accompanied by heavy reliance on a concentrated group of large customers in both public and commercial sectors. If these key contracts do not renew or ramp as quickly as projected, revenue volatility and customer concentration risk could negatively impact future earnings and revenue stability.
  
• Although the ongoing digitization of media, government, and enterprise workflows positions Veritone's core business to benefit from trends such as increased need for advanced content management and automated audio/video analysis, rapid commoditization of AI models as large hyperscalers invest $400 billion annually into proprietary AI infrastructure risks eroding Veritone's differentiation and pricing power, eventually pressuring gross margins and constraining margin expansion efforts.
  
• While strong pipeline growth and the company's demonstrated ability to convert contracts-such as the multiyear DoD Air Force deal and significant expansion of VDR engagement with hyperscalers-provide forward visibility into future revenue acceleration, Veritone still operates with persistent operating and net losses, limited cash reserves, and reliance on equity and debt financing. This financial fragility may restrict the company's ability to sustain investments in R&D and scale operations, heightening risk to net margin improvement and earnings generation.
  
• While regulatory drivers are expected to boost demand for media monitoring, compliance, and AI-powered analytics tools, intensifying global AI regulation and privacy mandates could impose additional compliance costs and operational complexity. This may increase operating expenses and slow enterprise adoption, thus limiting the company's ability to fully capitalize on addressable market expansion and dampening top-line growth.
  
• Despite the company's reference wins, accelerating deal flow, and growing reputation for managing unstructured data at scale, ongoing macroeconomic uncertainty and cutbacks in discretionary technology budgets-particularly within managed services and hiring solutions-could delay project starts, elongate sales cycles, and further depress currently weak net margins, especially if Veritone is unable to offset declines in legacy business lines with newer high-growth products.

Veritone Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Veritone compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Veritone's revenue will grow by 16.4% annually over the next 3 years.
• The bearish analysts are not forecasting that Veritone will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Veritone's profit margin will increase from -102.8% to the average US Software industry of 13.3% in 3 years.
• If Veritone's profit margin were to converge on the industry average, you could expect earnings to reach $19.1 million (and earnings per share of $0.28) by about August 2028, up from $-93.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from -1.6x today. This future PE is lower than the current PE for the US Software industry at 36.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.8%, as per the Simply Wall St company report.

Veritone Future Earnings Per Share Growth

Risks

• Veritone continues to experience persistent operating losses and cash burn, as evidenced by a net operating cash outflow of $25.2 million in the latest quarter and ongoing non-GAAP net losses of $8.7 million, raising concerns about its ability to reach sustainable profitability and increasing the risk of future equity dilution or need for additional financing, which could negatively impact earnings per share.
  
• The company's gross margins are under considerable pressure, with reported non-GAAP gross margins declining by 470 basis points year over year and the fast-growing VDR product currently delivering roughly 40 percent gross margins (significantly below the rest of the business), implying that future top-line growth may not translate into proportional bottom-line improvement and could depress overall net margins.
  
• Revenue projections and guidance are heavily dependent on large, concentrated contracts particularly public sector agreements such as the Air Force deal and high-value VDR contracts with hyperscalers making future revenues vulnerable to deal timing, contract ramp delays, and customer concentration risks, all of which may lead to heightened quarterly revenue volatility.
  
• The broader AI and data management marketplace is seeing rapid commoditization of models and technology, as well as increasing dominance by well-capitalized hyperscalers and technology giants, which could erode Veritone's differentiation, put downward pressure on pricing, and reduce future revenue and margin potential if the company is unable to maintain its competitive edge.
  
• Ongoing softness in Managed Services and macroeconomic headwinds (notably in hiring and advertising markets) are contributing to lower and declining revenues in these segments, with management acknowledging these trends may persist until there is a demonstrable improvement in the broader economy, thus posing ongoing risks to total company revenue growth.

Valuation

• The assumed bearish price target for Veritone is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Veritone's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $143.3 million, earnings will come to $19.1 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of $2.63, the bearish analyst price target of $3.0 is 12.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.