Can SenseTime Maintain Its Edge

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Today let’s talk about SenseTime, one of China's leading AI startups (the rest three is Megvill, Yitu, iFlytek), best known for computer vision technology that can power facial recognition software, right now losing its technology advantage.

SenseTime has always been in the turmoil of US-China politics. It's famous for making software that can recognize faces, something you might have heard in use across China, like in city streets helping keep things safe and orderly. Then, in 2021, the U.S. Treasury designated it as part of the “Chinese military-industrial complex companies,” a move that subsequently delayed its IPO.

Recently, the research firm Grizzly chose to short sell SenseTime’s stock. Citing social media screenshots and lawsuits, they accused SenseTime of engaging in what's called 'revenue round-tripping', which means that SenseTime allegedly provided funds to clients to purchase its own products, yet failed to deliver these products, thereby artificially inflating its revenue.

Short-sellers like Grizzly Research place 'short' bets against companies, profiting when those companies' share prices fall. It's worth noting that back in September, Grizzly targeted Pinduoduo (PDD), the parent company of Temu, for short-selling. Defying Grizzly's predictions, Pinduoduo's stock didn't just hold steady, it surged, particularly after its Q3 reports last week. PDD's market cap reached $195.9 bn, overtaking Alibaba as China's top e-commerce company in value. 

SenseTime has denied the report twice, stating that it is “without merit and contains unfounded allegations, misleading conclusions, and interpretations.”

Nevertheless, this situation has thrust SenseTime into the spotlight once again. It raises a crucial question for every AI startup in China: Can they achieve a position of sustainable, long-term profitability?

II 

Now, let’s be real. Take a peek at SenseTime’s financials – it's clear the company is still in the red. Here’s the scoop from their mid-2023 report: they've accumulated a loss of $3.4 bn, while their revenue stood at only $1.4 bn. Additionally, their gross profit margin experienced a significant drop, plunging by 30.6% to just 45.3%.