The Risks and Rewards of Investing in SoundHound AI

With a $1.68 billion market cap, SoundHound AI, Inc. (SOUN) is one of the most prominent names in AI-powered voice applications, drawing significant attention from investors and analysts. Shares of SOUN have surged more than 134% over the past six months and nearly 138% year-to-date.

SOUN is at the forefront of conversational intelligence, offering voice AI solutions that allow businesses to provide incredible conversational experiences to their customers. Built on proprietary technology, it offers top-tier speed and accuracy in multiple languages to product creators across automotive, IoT devices, restaurant, and customer service industries.

SoundHound’s innovative AI-driven products include Smart Answering, Smart Ordering, and Dynamic Interaction™, a cutting-edge real-time, multimodal customer service interface.

According to research compiled by Mordor Intelligence, the voice recognition market is expected to reach $42.08 billion by 2029, growing at a CAGR of 23% during the forecast period (2024-2029).

In the dynamic field of voice recognition technology, SoundHound encounters competition from various players striving to innovate and capture market share. Rivals range from established giants like Alphabet Inc. (GOOGL) and, Inc. (AMZN) to emerging start-ups specializing in AI-driven solutions, including Krisp, Deepgram, and more.

Let’s discuss SoundHound’s fundamentals and growth prospects in detail.

Accelerates Voice AI Innovation with Strategic Partnerships and Acquisitions

On May 9, SOUN partnered with Perplexity, the conversational AI-powered answer engine. The collaboration will integrate Perplexity’s online large language model (LLM) capabilities into SoundHound Chat AI across cars and IoT devices.

Leveraging Perplexity, the SoundHound Chat AI assistant will offer precise and up-to-date responses to web-based queries, addressing the type and complexity of the questions beyond the reach of static LLMs. This strategic move aims to solidify SoundHound’s AI product as the most advanced voice assistant available in today’s market.

Further, SoundHound unveiled a significant milestone on March 25. The company announced that its voice assistant with integrated ChatGPT debuted in vehicles in Japan. SoundHound Chat AI Automotive became the world’s first in-vehicle voice assistant with integrated generative AI upon its launch in April 2023. Starting in March, it became accessible in Stellantis DS Automobiles across Japan.

Also, on March 18, SOUN introduced an in-vehicle voice assistant that uses LLM on the edge through the NVIDIA DRIVE platform. SoundHound’s collaboration with NVIDIA Corporation (NVDA) expands the reach of generative AI to new places and situations, ensuring optimal performance even without cloud connectivity.

Notably, during the March quarter, the company closed the previously announced acquisition of SYNQ3 Restaurant Solutions, a leading provider of voice AI and other tech solutions for the restaurant sector. This deal will extend SOUN’s market reach by an order of magnitude to more than 10,000 signed locations and accelerate the deployment of leading-edge generative AI capabilities to the industry.

SYNQ3 will expand SoundHound’s customer base significantly, with the addition of prominent brands across the drive-thru, fast casual, casual dining, and convenience store segments – bringing the total to over 25 national and multinational chains.

Mixed First-Quarter Results and Upbeat 2024 Outlook

For the first quarter that ended March 31, 2024, SOUN’s revenues increased 73% year-over-year to $11.59 million. That surpassed analyst expectations of $10.10 million. The company’s non-GAAP profit rose 56.8% from the prior year’s quarter to $7.59 million.

Moreover, SoundHound’s cumulative subscriptions and bookings backlog was $682 million, up nearly 80% year-over-year. Also, it reported a 60% year-over-year increase in the annual run rate of more than 4 billion queries. SOUN had a cash balance of $226 million at the end of the first quarter.

“We were pleased to start the year with a robust top line performance, in our strongest Q1 ever,” stated Nitesh Sharan, CFO of SoundHound AI. ”Our business momentum continues to accelerate with a growing pipeline across all businesses.”

However, the company’s bottom line suffered significantly. SOUN’s adjusted EBITDA loss widened by 3.3% year-over-year to $15.40 million. Further, its net loss worsened by 20% from the year-ago value to $33.01 million. It posted a loss per share of $0.12, missing the consensus loss per share estimate of $0.09.

During the quarter, SOUN’s cash outflows from operating activities and investing activities were $21.95 million and $3.79 million, respectively.

Meanwhile, SOUN updated its full-year 2024 revenue guidance to be in a range of $65 to $77 million. Further, the company aims to achieve adjusted EBITDA profitability by 2025, anticipating even greater growth, with revenue exceeding $100 million.

Decelerating Profitability

SOUN’s trailing-12-month gross profit margin of 72.42% is 45.9% higher than the 49.6% industry average. However, the stock’s trailing-12-month EBIT margin and net income margin of negative 131.21% and negative 186.20% are unfavorable compared to the industry averages of 4.68% and 2.63%, respectively.

Additionally, the stock’s trailing-12-month levered FCF margin of negative 58.19% compared to the industry average of 10.12%. Its trailing-12-month ROCE, ROTC, and ROTA of negative 148.22%, negative 28.94%, and negative 32.88% compared to the respective industry averages of 3.91%, 2.57%, and 1.42%.

Elevated Valuation

In terms of forward EV/Sales, SOUN is trading at 21.93x, 657.9% higher than the industry average of 2.89x. Similarly, the stock’s forward Price/Sales of 23.62x is significantly higher than the industry average of 2.96x. Also, its trailing-12-month Price/Book multiple of 10.61 is 234.4% higher than the industry average of 3.17.

Bottom Line

SOUN’s position as a global leader in AI-powered voice applications and its strategic initiatives set it for continued growth in a rapidly expanding market. The company’s innovative AI-powered products, strategic partnerships with Perplexity and NVIDIA, and the recent acquisition of SYNQ3 accelerate market expansion across automotive and restaurant sectors, offering opportunities for revenue diversification.

Despite impressive revenue growth in the first quarter of 2024, SoundHound faces profitability challenges, as reflected in widening losses and negative margins. Continued losses and cash burn could strain financial resources and investor confidence.

Analysts expect SOUN’s revenue for 2024 and 2025 to increase 53.7% and 46.6% year-over-year to $70.52 million and $103.35 million, respectively. However, the company is expected to report losses for at least two fiscal years. Moreover, SoundHound failed to surpass consensus EPS estimates in three of the trailing four quarters, which is disappointing.

SoundHound’s valuation metrics, such as its forward EV/Sales and Price/Sales ratios, indicate a premium compared to industry peers. An elevated valuation can often lead to enhanced volatility and susceptibility to market corrections, particularly if the company fails to meet growth expectations or faces challenges in achieving profitability.

Thus, investing in SOUN presents a blend of potential risks and rewards for investors to consider. While the company demonstrates strength in revenue growth and market leadership within the voice recognition sector, notable challenges warrant attention, including massive losses, rapid cash burn, and stretched valuation.

So, investors are advised to monitor SOUN’s financial performance, execution of growth plans, and market dynamics before making informed investment decisions.

Why Analysts Are Bullish on SoundHound's Long-Term Growth Potential

The enthusiasm surrounding SoundHound AI, Inc. (SOUN) is palpable. With solid revenue growth and strategic collaborations underlining its long-term potential, the stock has gained immense traction among investors. In this piece, we will evaluate why analysts are bullish about SOUN’s growth prospects.

SoundHound is at the forefront of voice-based conversational AI technology, offering solutions that enable seamless interactions across numerous languages. Its AI system is deployed in various sectors, including customer service call centers, restaurant ordering platforms, and automotive systems. With a market cap of $1.62 billion, SOUN falls within the mid-cap category, making it an attractive option for investors seeking growth opportunities in the AI sector.

SOUN’s shares have delivered an outstanding performance, gaining nearly 150% year-to-date and more than 135% over the past three months. Excellent, isn’t it? Moreover, despite recent pullbacks, the stock is comfortably above its 200-day moving average of $3.05, indicating an upward trend.

SoundHound’s Strategic Partnerships and Acquisitions

On May 9, SOUN partnered with Perplexity, the conversational AI-powered answer engine. This partnership is geared toward enhancing voice assistant functionality across several devices, such as cars and IoT devices, by integrating online LLMs (Large Language Models), making it the most advanced voice assistant on the market.

Moreover, the company closed the previously announced acquisition of SYNQ3 Restaurant Solutions in the March quarter, becoming the largest provider of voice AI for restaurants in the U.S. With more than 10,000 signed locations and significantly more in the pipeline, this acquisition expands SOUN's presence in this sector.

Impressively, the restaurant segment now contributes approximately 30% of the company's total revenue, surpassing initial forecasts set for FY24 by a significant margin.

Additionally, SoundHound has forged collaborations with major brands such as Applebee’s and Church’s Chicken, augmenting its market presence and revenue streams. Furthermore, the company has secured agreements to integrate its voice assistant technology into the luxury vehicle lineup of a leading Asian electric car manufacturer and a major U.S.-based EV maker’s entire fleet later this year.

SOUN's partnership landscape remains vibrant, as demonstrated by its recent collaboration with NVIDIA Corporation (NVDA) on March 18, 2024. Under this partnership, the company would deliver in-vehicle voice-enabled generative AI responses that operate seamlessly without needing connectivity.

In light of these advancements, SOUN experienced a surge in demand for its voice AI solutions across the automotive and restaurant sectors. By securing significant brand partnerships, the company propels its growth trajectory and solidifies its position in the competitive conversational AI market.

Solid Financial Performance and Growth Outlook

In the first quarter that ended March 31, 2024, SOUN reported strong top-line performance, with a remarkable 73% year-over-year growth in revenues to $11.59 million, beating analyst expectations of $10.10 million. The company's three-pillar strategy, focusing on AI for customer service, in-car systems, and IoT devices, fueled its performance with notable expansions in its drive-thru AI service and Smart Ordering offering.

The company’s non-GAAP profit increased 56.8% year-over-year to $7.59 million. Meanwhile, its cumulative subscriptions and bookings backlog grew 80% to $682 million, driven by solid product royalties and a robust automotive segment. Moreover, it witnessed a 60% year-over-year increase in the annual run rate of queries, which was over 4 billion in the first quarter.

Keyvan Mohajer, CEO and Co-Founder of SoundHound AI remarked, “Voice AI is rapidly becoming indispensable for customer service, as evidenced by the growing demand for subscriptions.”

However, on the bottom line, the company continued to grapple with profitability issues, reporting a non-GAAP net loss of $19.88 million or $0.07 per share, alongside an adjusted EBITDA loss of $15.40 million.

Despite these setbacks, SOUN revised its full-year revenue guidance upward (on the lower end), projecting a range of $65 to $77 million. It also aims to achieve adjusted EBITDA profitability by 2025, where the company anticipates even greater growth, with revenue exceeding $100 million (more than double the $45.9 million it reported in 2023).

Mixed Analyst Expectations

Street expects SOUN to generate a revenue of $13.75 million for the second quarter (ending June 2024), indicating a 57.1% year-over-year increase. Yet, the company is expected to report a loss per share of $0.08 for the ongoing quarter.

Furthermore, for the fiscal years 2024 and 2025, analysts anticipate a revenue surge of 53.7% and 45.6% on a year-over-year basis, reaching $70.52 million and $103.35 million, respectively. However, earnings per share is predicted to remain in negative territory at least over the next two years.

Additionally, the company has surpassed consensus revenue estimates in three of the trailing four quarters, suggesting a strong likelihood of continuing its growth trajectory in the upcoming quarters.

Bottom Line

SOUN’s first quarter establishes the tone for 2024 as another year of solid growth for the company. The growing necessity of voice AI in customer services is reflected in the increasing demand for its subscription services. Leveraging over two decades of technology innovation and billions of customer interactions, SoundHound, as an AI company, excels in delivering top voice AI technology in the market.

Across automotive and customer service, renowned global brands are turning to the company for unparalleled experiences.

Wedbush analyst Daniel Ives reaffirmed an “Outperform” rating for SOUN, setting a price forecast of $9. After the first quarter results, the analyst stated that the company continues to witness robust demand for its voice AI products within the automotive and restaurant sectors. This growth is driven by securing major brand partnerships, thereby grabbing market share in the conversational AI market.

Also, analysts at Cantor Fitzgerald upgraded SOUN stock to “Neutral” from “Underweight.” In a separate development, Cantor Fitzgerald analyst Brett Knoblauch upgraded the stock from Sell to Hold.

Although the stock shows potential for growth driven by the booming interest in AI technologies, it is currently plagued by profitability issues. SOUN’s trailing-12-month EBITDA margin, net income margin, and levered FCF margin of negative 125.2%, negative 186.2%, and negative 58.2% compare to the industry averages of 9.82%, 2.48%, and 10.05%, respectively.

Looking at valuation, we believe that the stock is trading at a premium compared to its peers. SOUN’s forward EV/Sales of 23.05x is 715.4% higher than the industry average of 2.83x. Likewise, in terms of forward Price/Sales, the stock is trading at 24.74x, higher than the industry average of 2.88x.

Nevertheless, SoundHound AI's intrinsic value lies in its technological advancements and market positioning, particularly in conversational AI technologies.

Considering these factors, SOUN presents a potentially lucrative yet volatile investment profile. Therefore, investors should carefully monitor future earnings reports and corporate developments before making investment decisions.