Presto Automation Is Not Living Up To Expectations As Revenues Decline

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Artificial Intelligence. Concept


Investment thesis

In November, I wrote a bearish article connected SA astir edifice tech supplier Presto Automation (NASDAQ:PRST) successful which I said that nan institution had been incapable to pull immoderate awesome clients successful 2022 and important dilution was likely. Well, Presto precocious released its Q2 FY23 financial results, and I deliberation nan business looks grim arsenic revenues declined by 4.5% twelvemonth connected twelvemonth while nan nonaccomplishment from operations almost doubled to $13.6 million. In addition, rate declined by $21 cardinal successful a azygous 4th and important banal dilution seems inevitable astatine this point. Let’s review.

Overview of nan Q2 FY23 financial results

In lawsuit you haven't publication my erstwhile articles astir Presto, here's a short explanation of nan business. The institution started retired nether nan sanction E la Carte successful 2008 and is focused connected A.I.-powered drive-thru sound adjunct exertion through Presto Voice. Presto besides has a merchandise named Presto Flex, which functions arsenic an all-in-one server handheld aliases tabletop impermanent ordering, payment, customer personalization, and gaming device. The institution has deployed much than 270,000 products crossed nan USA to day and claims that its Presto Voice virtual adjunct tin prevention $35,000 successful labour costs per twelvemonth arsenic good arsenic importantly summation nan stock of repetition customers significantly.

Presto Voice

Presto Automation

Presto Voice KPIs

Presto Automation

According to Presto’s website, nan institution accounts for 3 retired of each 4 drive-thru A.I. sound assistants successful nan state and its clients see McDonald’s, KFC, Checkers, Applebee’s, and Chili’s among others.

Presto Automation clients

Presto Automation

There are astir 200,000 quick-service edifice drive-thrus successful nan USA and this represents a $5 cardinal yearly recurring gross (ARR) according to nan institution (see descent 7 here). Presto's existent aviator tests pinch customers correspond much than $200 cardinal successful ARR connected a afloat converted basis.

In bid to money its accelerated description , nan patient announced successful October 2021 that it’s listing done a merger pinch a typical intent acquisition institution (SPAC) named Ventoux CCM Acquisition Corp a valuation of astir $1 billion. Presto was expecting to get astir $222.5 cardinal successful cash, but it ended up receiving conscionable nether $50 cardinal erstwhile nan merger was completed successful September 2022 arsenic galore investors decided to withdraw. The institution planned to usage nan proceeds to importantly grow its level business, which includes income and leases of nan AI level products. The transaction business, successful turn, includes premium content, aliases gaming.

Presto Automation gross forecast

Presto Automation

Yet, pinch proceeds from nan SPAC woody overmuch little than expected and restaurants reopening pursuing nan extremity of COVID-19 lockdowns, nan financial capacity of Presto has been underwhelming. Looking astatine nan Q2 FY23 financial results, we tin spot that nan transaction business was increasing astatine a dependable pace, but nan gross of nan level business was down by almost 20% twelvemonth connected year. Presto is acold disconnected nan financial estimates from October 2021 erstwhile it was projecting quarterly revenues of almost $14 cardinal successful nan 2022 almanac year. I besides find it disappointing that operating costs are overmuch higher than anticipated, particularly G&A expenses which are now complete $6 cardinal successful a azygous quarter.

Presto Automation Q2 FY22 income statement

Presto Automation

Presto Automation financial projections

Presto Automation

The deficiency of gross maturation tin beryllium explained by nan deficiency of immoderate caller notable clients complete nan past twelvemonth arsenic nan 3 awesome customers of nan institution accounted for 96% of revenues, compared pinch 89% a twelvemonth earlier. The nonaccomplishment of immoderate of them could beryllium detrimental to nan financial results of Presto.

Presto Automation apical customers

Presto Automation

Looking astatine what to expect successful nan future, Presto announced successful January that it’s expanding its business pinch Del Taco which has complete 600 locations crossed nan USA. Presto past revealed successful its Q2 FY23 earnings call that nan full opportunity astatine 600 stores was worthy much than $10 cardinal successful ARR. If a ample number of Del Taco restaurants instal Presto Voice, Presto’s level revenues could summation by complete a 3rd successful nan adjacent future. However, this magnitude is obscurity adjacent capable to get nan institution into nan black, and rate is moving retired rapidly. Presto had $59.3 cardinal successful rate and rate equivalents successful September and this fig was down to $38.2 cardinal arsenic of December. The shareholders’ equity is now antagonistic and nett rate utilized successful operating activities successful Q2 FY23 was $15.4 cardinal compared to $11.2 cardinal a 4th earlier. Unless thing changes drastically soon, Presto could tally retired of rate astir July and I deliberation important banal dilution seems likely.

Presto Automation Q2 FY23 equilibrium sheet

Presto Automation

So, really do you play this? Well, short trading seems for illustration a viable thought arsenic information from Fintel shows nan short get interest complaint is 15.79% arsenic of nan clip of writing. The short liking is conscionable 0.31% of nan float and it takes little than 2 days to screen truthful nan short compression consequence seems small. Unfortunately, location are nary telephone options disposable for hedging purposes.

Looking astatine nan risks for nan carnivore case, I deliberation that nan awesome 1 is nan precocious investor liking successful AI stocks complete nan past fewer weeks arsenic ChatGPT gained fame worldwide. Presto has utilized GPT-3 for respective of its applications and OpenAI CEO Sam Altman is among its early backers, having invested successful nan institution backmost successful 2014. In my view, this accrued investor liking successful nan AI assemblage has been nan cardinal driver for nan 53% YTD summation successful Presto’s marketplace valuation and it’s unclear really agelong it will last.

Presto Automation stock price

Seeking Alpha

Investor takeaway

Presto grew quickly during nan COVID-19 lockdowns, but nan latest fewer quarters person been challenging. In addition, operating expenses are supra erstwhile expectations, nan shareholders’ equity is negative, and rate is moving retired rapidly. In my view, nan institution could request to transportation retired a ample equity offering earlier autumn which is apt to consequence successful important banal dilution. Yet, short trading could beryllium vulnerable arsenic nan company’s banal value seems to beryllium getting a boost from nan rising investor liking successful nan AI sector. In my view, it could beryllium champion for risk-averse investors to debar this stock.

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