A Warning About “Artificial Intelligence Stocks”
We’ve been writing about emerging technology investing since 2004, and the one thing that grinds our gears more than anything else is to see well-intentioned investors get fleeced. Notice how we say investors, not speculators. As a speculator, you need no warnings because you approach everything as you would a roulette wheel. For investors though, the intention is to give money to a venture that promises to give you back more money at a much later date in the future. It’s hard to see any emerging technology company doing this properly in under a decade. That’s why we look at long time horizons when it comes to investing in emerging technologies like artificial intelligence.
It wasn’t but 6 months ago that we wrote an article titled “Investing in Artificial Intelligence (AI) Stocks is BS” while pointing out how all the mainstream pundits are taking an “Invest in Everything with Google” approach to AI stocks. Sure, you can invest in Amazon, Google, and IBM and then claim that you’re “invested in AI stocks” but the fact is that you’re not. While these companies use artificial intelligence, they’re hardly pure plays on the AI theme. We concluded that “You Can’t Invest in Artificial Intelligence Yet” with the exception being chipmakers like Nvidia which are picks and shovels plays on AI.
Earlier this year, we took a look at a fascinating AI company that may IPO soon called Afiniti, and then looked at another company called Veritone (NASDAQ:VERI) that had an IPO but hardly seemed to be a play on AI. Fast forward to this past week and we wrote another article on Veritone and ITUS talking about how both these stocks seem to be under manipulation. Then, a few days ago we came across the following article from Benzinga:
That is an irresponsible title to use for this article, though the author does make a mild attempt at pointing out the risks at the end of the article. Think about your elderly parents getting all excited about AI after watching a special on CNN, and then deciding to invest based on this thesis. This sort of clickbait journalism is more focused on getting eyeballs than doing people a service by providing useful content. Let’s take a closer look at the 8 stocks mentioned in the article.
The first stock mentioned is Veritone which we’ve written about before here and here. Just hours ago, Citron Research (a notorious short seller) blasted VERI with a tweet. If you take investment advice from Twitter then you deserve to lose your money, but in this case Citron may be on to something:
The next 7 companies in the list from Benzinga are as follows (along with their corresponding market caps):
- Inseego (NASDAQ:INSG) – $81 million
- Foresight Automotive Holdings (NASDAQ:FRSX) – $114 million
- MYnd Analytics (NASDAQ:MYND) – $18 million
- Social Reality (NASDAQ:SRAX) – $17 million
- Innodata (NASDAQ:INOD) – $36 million
- Seven Stars Cloud Group (NASDAQ:SSC) – $164 million
- Cray (NASDAQ:CRAY) – $781 million
Let’s look at how much “artificial intelligence” we can see in each of these stocks.
Founded in 1996, San Diego company Inseego is a global provider of hardware and software IoT solutions with more than 600,000 global subscribers. Their main product called Ctrack is a global telematics solution for fleets. The company had an IPO in November of last year and since then shares are down -42%. A look at their most recent 10-Q and 10-K show not one mention of AI and the same goes for their website. Should mentions of AI suddenly start to appear, that would seem awfully suspicious.
Foresight Automotive Holdings (NASDAQ:FRSX)
We’ve written extensively about driverless car technologies, and more recently we touched on a technology referred to as “Advanced Driver ASsistance” or ADAS. That’s what FRSX offers, an ADAS solution with functionality like forward collision warnings, lane departure warnings, automatic emergency braking, and adaptive cruise control:
As you can see in the above diagram, FRSX makes the case that “camera vision” is just one technology that will be used to enable autonomous driving with others like ultrasound and LiDAR also playing key roles. FRSX is an Israeli firm and traded in Israel, though the stock recently started trading on NASDAQ as an ADR. It’s a small company right now with just 34 employees and a stated goal to bring a beta version to market by Q3/2018. With investors like Porsche, Citroen, Audi, and Volkswagen, we’re surprised to see their latest news is focused on pilots with large Chinese auto companies. This is a play on the autonomous vehicle theme and the technology being used here is computer vision (which could very well use AI algorithms). If this is an “AI stock” then so are Cognex (NASDAQ:CGNX) and ISRA VISION (ETR:ISR).
MYnd Analytics (NASDAQ:MYND)
First thing we note is that for the first 3/4 of 2017, this company has sold just $94,500 of whatever it is they sell while burning through over $4 million. What they sell is called “PEER Online” and it involves having a mental health patient sit through 30-60 minutes of EEGs and then using 2,400 different variables to predict which treatments will be most effective. While we see no mention of AI algorithms being used, they could very easily get some free, off-the-shelf AI framework and hire a few AI developers then plaster mentions of AI all over their site like Veritone did. The truth is though, they aren’t selling very much of this product and that needs to change fast otherwise they’re a solution looking for a problem.
Social Reality (NASDAQ:SRAX)
Just last week we tried to run an ad on Facebook and they said we couldn’t use “age” in the ad because that might offend people. Here was the ad:
Then the arbitrator handling our customer service complaint refused to give us their name or their manager’s name, so we won’t be spending one red penny with them ever again. Instead, we might turn to a company like SRAX which helps companies like ours to “maximize ad revenues”. SRAX is a minuscule company but they are in fact selling stuff and showing strong revenue growth over time:
SRAX makes it a point to say right on their homepage that “machine-learning technology optimizes performance for marketers and content owners”. The truth is though, as a publisher we’re not likely to switch away from Google ads and as investors, we’re not likely to take a punt on a company like this. Google’s Deepmind is perhaps one of the most advanced AI algorithms out there, and Google knows more about you than anyone else based on what you search for. Still, maybe we’ll have a look at their technology and report back on what we find for a future article.
Founded in 1998, this rather complicated 4,400 employee company has three reporting divisions with just one bringing in 77% of revenues – Digital Data Solutions or DDS. A broad description of this division is that it develops digital content and digital information products with two clients representing ~30% of revenues. Boldly stated across the front of their home page is the below statement from the CEO:
Every day we leverage the latest algorithms, machine learning technology, advanced natural language processing, and proprietary extraction and tagging tools to speed product creation and lower costs.
In their last 10-K, just one mention is made of machine learning which talks about using AI algorithms to extract meaningful data from structured data. These days any company can easily avail the services of an AI startup (there are 3,000+ out there) to automate particular tasks so that using AI is just like using electricity. There are loads of AI frameworks you can download for free and it wouldn’t take much to hire a few developers and say you are “using AI”. When your share price looks like this over the past 23 years then you’re going to need a lot more than that to turn the ship around:
Innodata is still not profitable and revenues appear to have stagnated over the past 5 years. Hopefully they can sort themselves out.
Seven Stars Cloud Group (NASDAQ:SSC)
This company looks like an absolute mess, and their “website” looks like some investor relations person just vomited buzzwords for about 20 minutes straight. Here’s a sample:
With a focus on ‘BASE’ technology and infrastructure (Blockchain, Artificial Intelligence, Supply Chain & Exchanges) to power our V PaaS (Virtual Platform as a Service), SSC is creating a closed trade ecosystem for buyers and sellers designed to eliminate supply chain and transactional middlemen and create a more direct and margin-expanding trading path for principals. SSC is applying BASE + V PaaS to focus on 3 Core Cloud Areas: I. Intellectual Property Cloud; II. Product Sales Cloud; III. Financial Services Cloud.
It’s a Nevada corporation that operates in China, and we’re going to just stop right there. If this company can’t take the time to put up a website that properly formulates their value proposition, then we’re not going to take the time to dig through their filings and figure out what it is they actually do.
This is a company that you may have actually heard of before. With a market cap of just under $800 million, this company has been selling supercomputers since 1976. With over $600 million in revenues last year, they’re definitely selling some hardware.
A cursory look at their filings shows some lawsuits with Raytheon over patent disputes which presents some unknown levels of risk. We’re going to dig into this company in a coming article to see how their supercomputers tie in to themes like “big data” and “AI”. Are they going to be buried by the emergence of quantum computers? Sign up to our newsletter so you don’t miss the article.
It’s surprising that we haven’t seen an onslaught of OTC companies claiming to be “artificial intelligence leaders”, and it’s only a matter of time before we’ll be writing about them and warning investors about pitfalls that the SEC refuses to regulate properly. In the meantime, the more sophisticated stock promoters will use campaigns to promote “artificial intelligence stocks” that can easily be put together with a low-float micro-cap and a few mentions of “machine learning” on the homepage and SEC filings. Usually when you dig a bit deeper, it’s easy to see that the core business has nothing to do with AI or they downloaded a free framework and hired a few AI developers but have nothing to show for it.