Why Innodata Stock Tumbled by 10% Last Month

Innodata's (NASDAQ: INOD) August was marked by an estimates-beating second quarter, but you wouldn't know that from how its stock performed that month. It fell by 10% due to other developments that investors didn't view as particularly positive.

An impressive second frame

Let's shine a light on the good news first. On Aug. 6, Innodata took the wraps off that quarter's figures, which were headed by revenue of $92.1 million for the period -- up nearly 58% year over year. That total set a new quarterly record for the company, as did other line items like gross profit not under generally accepted accounting principles (non-GAAP, or adjusted).

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Innodata didn't hesitate to note that this was the 12th consecutive quarter in which it posted year-over-year revenue growth.

In a similarly encouraging development, the tech company's GAAP net income almost doubled, to $14.4 million, or $0.41 per share.

Both headline results were more than sufficient to beat the consensus analyst estimates. $86.3 million was the average pundit projection for revenue, and those professionals collectively anticipated only $0.22 per share in GAAP net income.

Innodata is doing well on the sustained, feverish build-out of artificial intelligence (AI) compute. It has carved out quite a strong niche as a business that provides data sets and evaluation services in the training of AI models.

New leader and capital incoming

In the earnings release, several paragraphs down from Innodata's evaluation of the quarter, it revealed that it had named a new CEO. The incoming leader is the company's current chief revenue officer, Rahul Singhal, who is to take the reins on Sept. 30. He replaces longtime CEO Jack Abuhoff, who will add the "executive" modifier to his chairman role on the board of directors.

Although Innodata described the change as being "planned," it was news to the general public.

Another generally unexpected development was a capital raise. Innodata disclosed in a regulatory filing, also on Aug. 6, that it aims to sell up to $300 million of its common stock in an at-the-market (ATM) public offering. It's doing so in collaboration with a syndicate of sales agents that includes Goldman Sachs and Wells Fargo.

Innodata said it aims to use the proceeds of the issue "for working capital and general corporate purposes." It didn't add much detail to this.

If there are two things investors don't like in their companies, they're CEO changes that seem to come out of left field and potentially dilutive equity offerings with murky purposes. Innodata announced both on the same day, setting a generally bearish tone for the rest of the month in the absence of other major stock-moving news items.

While both are causes for concern, with Innodata I'd be more worried that its business -- thriving though it has been -- doesn't have a moat that's dauntingly high. There's also the company's client concentration; it currently derives 37% of its total revenue from a single, unnamed customer, and a second anonymous one is now responsible for 34%.

While the former's percentage is down notably from the first quarter's 56%, that's still a high degree of dependency.

This feels to me like a boom-or-bust stock, and right now I think the company is too vulnerable for comfort. I'd pass on owning its equity.

Wells Fargo is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.