This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Presto Automation
Unless you’ve been spending the last few months on a beach with your head buried under a layer of sand, you are pretty much fully aware at this point that artificial intelligence, better known and referred to simply as “AI” is changing the technological landscape and in many respects, the world in which we live.
From the prolific launch of OpenAI’s ChatGPT AI tool that can basically do your homework for you or almost instantly answer any single question you’ve ever had or write you a song about calculus in the style of famed rap artist Travis Scott (yes, we have tried this, and wow) to the broader rise in artificial intelligence in not only the tech industry but also the general retail sector, transportation and, heck, even the fast-food segment of the economy is seemingly gaining more and more interest regarding artificial intelligence and what it can do to potentially improve restaurant operations and overall business efficiency while harmoniously producing an excellent customer experience.
Additionally, to paint a slightly more grim portrait, as wages across the board have risen following the initial shock stemming from COVID-19 (as a result, in many respects, of many opting to not come back to work, for a multitude of reasons) it is our perspective that more and more companies, particularly in the customer service sector (broadly, that is to say not only the food and dining space, but others such as hospitality operators, among others) are more than likely looking to find and adamantly pursue ways in which they can feasibly cut back on some of their labor costs.
Enter AI.
While I personally best know Presto and its products from my days as a waiter at a few national restaurant chains (think Red Lobster, Applebee’s), such as their tabletop devices where diners (consumers, literally) can order, pay and also play games on the tablet while waiting for their food to be prepared, Presto has seemingly established itself as a leader in the automated drive-thru space, specifically, in designed and manufacturing a device with its roots deeply ingrained in artificial intelligence that can take someone’s order in a drive-thru setting.
Instead of telling a human your order, you’re essentially telling a robot your order.
This can be considered kind of scary for society as a whole given the implications of such a technology but also objectively could prove to be substantially more efficient for restaurant operators desperately looking to cut costs in terms of the technology accurately taking a customer’s orders and dare we say eliminating some costs through cutting some positions out of its restaurants in the process.
We are certainly not advocating one way or the other, but we are more so just trying to offer an accurate portrayal of what this company does, how it relates to AI and the implications to ponder of such technologies running restaurants and other segments of the economy.
All of this being said, Presto is engaged in the business of selling its products and services to restaurants, some more notable chains including the likes of Hardee’s, Carl’s Jr., Del Taco, Checkers, Kentucky Fried Chicken (KFC), Outback Steakhouse, Applebee’s, Red Lobster, Chili’s and others.
It’s rather difficult to say whether or not this emerging AI voice technology offered by the company is recession proof, however, we do firmly believe that like most proven, successful technology companies, Presto’s products are fairly sticky (i.e., hard for a client to go without after they’ve started using it) and as the technology within Presto’s ecosystem gains more and more accuracy, we think it’ll become a greater challenge for its restaurant partners to do without its offerings.
To the analysis, and beyond!
Presto’s stock financials
Still being a relatively young technology company, Presto Automation holds a market capitalization of $186.6 million, which may initially seem like a lot for those who aren’t as familiar with our past stock analysis articles, however, we typically analyze companies that are worth billions upon billions, so it’s a little different.
Nevertheless, the company’s shares (NASDAQ: PRST) are trading at a price of $3.31 with a price-to-earnings (P/E) ratio of 32.98 along with not an annually distributed dividend in sight, which is far from shocking given the nature of this company and its business(es).
While we aren’t usually the biggest fans of paying a premium for a company’s stock, which is seemingly what one would have to do in order to be a part owner in this company (given that its present price-to-earnings ratio is trading well above the fair value P/E benchmark of 20), we do find ourselves willing to make reasonable exceptions when there is some meaningful growth (typically in the form of revenues) within the company as it scales out, which just might absolutely be the case with Presto Automation.
As it pertains to the company not paying a dividend out at this juncture, we are frankly glad it isn’t and would rather it put any of its earnings right back into its business.
Moving right along, Presto’s executive team is tasked with taking care of and tending to around $30.5 million in terms of total assets as well as nearly $153 million in terms of total liabilities, according to the company’s displayed balance sheet on TD Ameritrade’s platform.
To us, this is way, way and we really mean way too overleveraged.
Given the mere fact that this company can’t even come close to paying off even a relatively small portion of its total liabilities without blowing through its entire amount of total assets is quite frankly disturbing to us.
Sure, it wouldn’t really surprise us if this company had a slightly greater amount of total liabilities than total assets given the nature of technology and the constant innovation and reinvestment that comes with the territory, however, storing around five times the amount of total liabilities to total assets isn’t exactly a favorable ratio.
At all.
In fact, from our vantage point it seems as though this company might’ve already dug itself into a hole that it won’t be able to dig itself out of, at least, anytime soon, perhaps in the latter stages of a bankruptcy filing.
While we won’t let this deter us from further exploring Presto Automation and its other core financials and supplemental metrics, it would be foolish and borderline negligent to not keep this in the back of our minds throughout the rest of this stock analysis.
At any rate, according to the company’s income statement, Presto’s total annual revenues have technically been growing, but at such an unimpressive rate, certainly not even coming close to justifying paying for the company’s stock (NASDAQ: PRST) while being overvalued (referencing its current P/E ratio), in our opinion.
Specifically, starting in 2020 the company’s total annual revenues stood at around $21.5 million, climbed a bit to almost $30 million in 2021, leading up to its latest reported figure of $30.3 million in 2022.
For revenue to be already be seemingly topping off within such a young company (founded in 2008) with so many organic and inorganic growth prospects on the horizon, it is astonishing (in a resoundingly negative way) that this company isn’t doubling or tripling its revenues on a year-over-year (YOY) basis, especially given that it is operating on an already comparably small revenue base.
This growth company is growthless (not literally, but you know what we mean).
With respect to the condition of the company’s cash flow statement, Presto’s net income and total cash from operations (also starting in 2020) both bleed red, increasingly so year after year, which is actually fine in the case of rapidly growing, proven technology companies (think companies like Fiverr, Uber and Spotify, just to name a few), however, the primary difference between these companies and Presto is that they are actually growing and their revenues are not even coming close to plateauing.
In other words, the cash burn is worth something in helping the aforementioned companies grow at a rapid rate and continue eating up market share.
As a sort of reference, the company’s total cash from operations in 2020 sat at approximately -$8.2 million, trending further to the downside as this figure was reported as being -$23.7 million the following year, down even further to its latest reported figure (displayed on TD Ameritrade’s platform) of -$47.2 million.
Given the state of the company’s balance sheet and revenues, this company seriously cannot afford to continue burning through this much cash and not obtaining results.
Presto’s stock fundamentals
If one was looking for more bad news regarding Presto and its financials, look no more, as this company’s listed trailing twelve month (TTM) net profit margin is absolutely abysmal compared to the industry’s respective average, which, if things weren’t bad enough, is also incredibly disappointing.
For instance, also according to TD Ameritrade’s platform, the company’s TTM net profit margin is pegged way below -68.08% to the industry’s respective average of -10.40%.
While given the information we initially gathered with respect to the company’s cash flow situation we weren’t expecting this company’s TTM net profit margin to be anything to write home about, but we were at least hoping to find that there is some light at the end of the tunnel with respect to the industry’s average, however, being that its TTM net profit margin is still negative, the light seems to be fading at an alarming rate.
Like we said, this company just simply can’t afford to keep not making money or else it will just die.
Additionally, the company’s TTM return on assets sits also below at -44.72% to the industry’s displayed average of 6.35%, but again, this was to be sort of expected given the information we have already gathered.
Should you buy Presto stock?
The messed up thing is we were pulling for this company, hoping that it could show off some strong, growth-filled numbers that justify potentially becoming a part owner in the AI dining revolution through this company’s stock (NASDAQ: PRST).
However, we are extremely unconfident in this company’s ability to exist within the rest of the 2020s given the horrific, leveraged state of its balance sheet, its excessive, continuous cash flow bleed, its more than lackluster growth in revenue in recent years, among other concerns.
At this particular moment in time, we wouldn’t feel obliged to touch this company’s stock with a one thousand-foot pole.
However, we definitely wouldn’t mind this company proving us wrong and making some sweeping changes that can maybe, just maybe change its current trajectory, but for the time being and given the information we have, we unfortunately view this company’s stock as a no-brainer “sell.”
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.