Nanalyze

Are Veritone and ITUS Corp. AI Pump and Dumps?

All of you old school tech investors out there will remember the boom in “nanotechnology stocks” that took place around 2003 when G. Dubya announced the 21st Century Nanotechnology Research and Development Act. People started flocking to Nanalyze to figure out which “nano stocks” to invest in, and we coined the phrase “nano in the name” to describe companies that were adding liberal mentions of nanotechnology to their websites and even renaming themselves in an attempt to take advantage of investors’ interest. The same phenomenon was observed during the peak of “dot com” where every company added “.com” to their company name and raised millions.

We’ve talked about how with artificial intelligence “things will be different” because any of the +3,000 “AI companies” that actually use AI effectively will be creating such value that the use of AI will be self-evident. We looked at how startups like Afiniti are raking in cash by simply taking a cut of all the money they save clients. And then we looked at companies like Veritone (NASDAQ:VERI) which plans to make money off of AI but isn’t actually making much money with it yet. Veritone had an IPO in May of this year with little fanfare, then suddenly their stock price jumped +357% in the last 30 days:

Any stock that moves this quickly and in such a volatile manner should be looked at with a great deal of suspicion. One litmus test is to see what people are saying on popular stock trading message boards. Here are some comments:

  • My pure plays in AI are VERI and ITUS. VERI is computer to computer and ITUS with new patent in AI for cancer detection. Both with huge futures.
  • This means bigger than AMZN or FB
  • VERI and ITUS just beginning in AI
  • Yes, like you I’m waiting for it to trade at 100 before buying

You can see how some entity is making a concerted effort to connect VERI with another stock called ITUS Corp which is developing “a series of inexpensive non-invasive blood tests for the early detection of cancer” which is said to be using artificial intelligence. The 30-day chart seen below shows a +225% stock price increase for ITUS with a +180% increase in the past 5 days alone:

Stock promoters are often quick to point at short-term stock price movements as validation of a stock’s future potential. As they continue to promote these stocks, volatility will increase sharply leading to price swings like we saw this past Tuesday (VERI up +35% and ITUS up +50%). Of course the whole thing is being encouraged with gems like these from unheard of “news outlets”:

Legitimate swing traders will come around sniffing and amateur shorts will pile in getting their asses handed to them resulting in short squeezes which drive the price even higher. This is all fine and dandy for speculators, but we have a major problem with this this. Here’s why.

When stocks behave like this, people will try and explain the stock price performance by saying it’s “because these AI stocks have so much potential”. They’ll point to stocks like Nvidia (NASDAQ:NVDA) which is a legitimate play on AI chips, and then claim that these stocks are “the next Nvidia” or just start referring to them interchangeably (even though Nvidia is more than 100X the size of the others). The companies being promoted will then start issuing press releases and moving towards “science by press release” as opposed to any actual progress being made selling things that use AI to add value. While nobody can say for certain whether or not VERI and ITUS are being manipulated by stock promoters, where there is smoke, there is fire.

Let’s take a quick look at each stock to see how AI is being used to add value.

Veritone (VERI) and Artificial Intelligence

Fortunately VERI breaks out their revenues so we can see what is attributed to AI and what is being attributed to their core business which is that of being a media agency. Here’s an excerpt from our last article on Veritone:

In 2015, Veritone took in $13.9 million of revenues from which less than $100,000 was from their AI platform. In 2016 though, they took in $500,000 in revenues from their AI platform which shows some real growth. The only problem is that during the same year, two of their key clients (LifeLock and DraftKings) which accounted for 43% of their revenues decided to spend less and consequently Veritone’s 2016 revenues fell -36% to $8.9 million. Not good.

We can see that it’s not just a function of growing AI revenues but sustaining their overall revenues. According to their latest 10-Q, they’re growing revenues but also incurring some pretty steep losses (all numbers in thousands):

VERI now has a market cap of over $800 million which is three times the size it was 30 days ago. There is a basic financial concept called the “efficient market hypothesis” which states that a stock price will reflect all currently available information. Are we to believe that in the last 30 days, additional information was made available to justify the value of VERI increasing by more than 300%? This hardly seems likely.

ITUS Corp (ITUS) and Artificial Intelligence

This is the first time we’ve come across this $29 million stock that claims to be developing a cancer blood test alongside the bazillion other companies that are doing the exact same thing. For the first nine months of 2017, they’ve taken in $362,500 in revenues so not a lot happening on that front. Their latest 10-Q is about as sparse as it gets, and there’s no mention of AI. Their website has a “please check back soon for updates” in place of a corporate presentation, and the only obvious mention of AI is seen below:

Just forgetting about AI for a second, cancer blood tests (or liquid biopsies) are being developed by numerous companies, and perhaps the most imposing of those would be Illumina. ITUS is a company with around $6 million in total assets and a $4 million loss for the first 9 months of this year. Just last month, they received a warning from Nasdaq that their stock price wasn’t complying with the $1.00 minimum bid price required for continued listing on the Nasdaq market. When ITUS shares suddenly start jumping around like a roofer on a meth binge, and coincidentally at the same time people are trying to group it in with VERI, this tells us that something is not right.

We’ve been watching stock promoters work their magic for over a decade, and we wouldn’t be surprised if this is just another case of a promising technology being used to manipulate stock prices. While we have no issue with people speculating in situations like this, we do have a problem with people who use the incredible promise of artificial intelligence for nefarious purposes which sullies the technology’s reputation and redirects capital away from legitimate ventures and into pump-and-dumps where naive retirees are often left holding the bag.

When investors ultimately get burnt and are standing there holding that bag, they’ll tell everyone how “artificial intelligence is just rubbish” making it harder for legitimate companies to raise money. Fortunately, we have a platform that lets us point these things out much to the chagrin of all the “nobody ever got hurt by jumping out of a basement window” types out there. We see you lads.

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