Sunday, June 16, 2024

The Risks and Rewards of Investing in SoundHound AI

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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 Amazon.com, 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.

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