It's been a rough ride for shareholders of artificial intelligence specialist Veritone (NASDAQ:VERI) since the company went public in 2017. Revenue got off to a hot start, growing 50% on an annualized basis, but shares have soured in 2018 as that revenue growth has suddenly slowed down. AI is a young industry, but high growth doesn't always make a stock a winner.

What does Veritone do?

Veritone claims bragging rights to having created the first operating system for AI. There are two business segments: a variable-income but high-profit-margin media agency that helps media outlets make use of consumer metrics and improve media spending and a software-as-a-service (SaaS) segment that offers an AI platform to media and entertainment, legal and compliance, and government organizations.

A man in a suit holding a tablet. An illustrated image of a brain made of electrical connections representing AI is hovering above the screen.

Image source: Getty Images.

Most of the company's revenue is generated by the media agency segment, called Veritone One. Veritone's overall revenue has stalled this year because of the variability of projects and fluctuations in sales from that segment -- although the company did report in the second quarter of 2018 that it had 74 active customers, a 64% increase from a year ago. While Veritone One will remain a crucial part of Veritone's overall business, SaaS and its underlying aiWARE operating system is becoming an increasingly important part of the company's future.

aiWARE orchestrates third-party cognitive engines -- a computer process that sorts through complex scenarios to find a solution -- from small tech outfits to huge companies like Google's parent Alphabet and Microsoft. Veritone customers pay a monthly subscription to use the aiWARE operating system, and Veritone in turn pays third parties based on volume of content processed on their cognitive engine. The segment is small, with average monthly recurring sales of just $214,000 at the end of the second quarter, but total customer count increased 126% year over year to 86.

A promising future, but question marks remain

Media and entertainment companies are making the most use of aiWARE right now, but legal and government organizations are beginning to see the benefits of making better use of AI in their operations, too. That alone might seem like a good reason to buy Veritone stock, but now might not be the right time.

The Veritone One media agency made up 75% of revenue through the first two quarters of 2018, and with high variability and little management guidance on the trajectory of that business, it's hard to say for certain what its future is. Year to date, media agency sales are down 3% from 2017. The AI platform service has grown 282% from the first half of 2017 but still only represents 25% of total revenue at $2.13 million.

The problem is that with Veritone on track to hit $17 million in annualized revenue based on first-half 2018 numbers, its current market cap of over $170 million seems like a steep price to pay. Free cash flow -- or money left over after operations and capital expenditures are paid for -- is running at a $43 million loss over the last 12 months, a figure that has continued to fall even as sales rise. The stock is thus priced with high growth expectations.

Veritone just completed a round of acquisitions -- Performance Bridge Media for $6 million, Wazee Digital for $15 million, and Machine Box for $2 million -- which will more than double the top line based on those companies' sales from the last year. But with existing operations flatlining and losses mounting, a key metric to watch will be whether Veritone One and aiWARE will be enough to reaccelerate. Until that happens, there could be more room for this stock to fall.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.