Risks and Rewards of Investing in SoundHound AI

With a market capitalization of $1.68 billion, SoundHound AI, Inc. (SOUN) As one of the most popular names in AI-based voice applications, it is receiving significant attention from investors and analysts. SOUN’s stock price has soared more than 134% in the past six months and nearly 138% since the beginning of the year.

SOUN is at the forefront of conversational intelligence, providing voice AI solutions that enable businesses to deliver amazing conversational experiences to their customers. Built on proprietary technology, it delivers unparalleled speed and accuracy in multiple languages ​​to product creators across the automotive, IoT device, restaurant, and customer service industries.

SoundHound’s innovative AI-based products include Smart Answering, Smart Ordering, and Dynamic Interaction™, a state-of-the-art, real-time, multi-modal customer service interface.

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

In the dynamic field of voice recognition technology, SoundHound faces competition from a variety of players striving to innovate and gain market share. Rivals range from established giants such as: Alphabet Inc. (GOOGL) and Amazon.com (AMZN) Applies to emerging startups specializing in AI-based solutions, including Krisp, Deepgram, and others.

Let’s take a closer look at SoundHound’s fundamentals and growth prospects.

Accelerate voice AI innovation through strategic partnerships and acquisitions

May 9, SOUN Partnering with Perplexity, a conversational AI-based answer engine. The collaboration will integrate Perplexity’s online Large Language Model (LLM) capabilities into SoundHound Chat AI across automotive and IoT devices.

The SoundHound Chat AI assistant leverages Perplexity to provide accurate, up-to-date responses to web-based queries and addresses the type and complexity of questions beyond the scope of a static LLM. This strategic move aims to solidify SoundHound’s AI products as the most advanced voice assistants available on the market today.

SoundHound also unveiled an important milestone on March 25th. The company announced a voice assistant with ChatGPT integration. Debut as a vehicle in Japan. Upon launch in April 2023, SoundHound Chat AI Automotive becomes the world’s first in-vehicle voice assistant with integrated generative AI. It will be accessible at Stellantis DS Automobiles across Japan starting in March.

Additionally, on March 18, SOUN launched an in-car voice assistant using LLM on Edge. NVIDIA DRIVE Platform. Collaboration with SoundHound NVIDIA Corporation (NVDA) Expand 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 previously announced operations. Acquisition of SYNQ3 Restaurant Solutionsis a leading provider of voice AI and other technology solutions for the restaurant sector. This agreement will expand SOUN’s market reach to more than 10,000 signing locations and accelerate the deployment of cutting-edge generative AI capabilities to the industry.

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

Mixed first quarter results and optimistic 2024 outlook

For the first quarter ended March 31, 2024, SOUN’s revenue increased 73% year-over-year to $11.59 million. This exceeded analysts’ expectations of $10.1 million. The company’s non-GAAP profit increased 56.8% year-over-year to $7.59 million.

Additionally, SoundHound’s cumulative subscription and reservation balance increased nearly 80% year-over-year to $682 million. They also reported a 60% year-over-year increase in annual execution rates of over 4 billion queries. SOUN’s cash balance at the end of the first quarter was $226 million.

“We are pleased to start the year with our best first quarter performance ever.” decided Nitesh Sharan, CFO of SoundHound AI. “Our business momentum continues to accelerate as our pipeline grows across all of our businesses.”

However, the company’s profitability deteriorated significantly. SOUN’s adjusted EBITDA loss increased 3.3% year over year to $15.4 million. Additionally, net loss increased 20% year-on-year to $33.01 million. Loss per share was $0.12, missing the consensus loss per share estimate of $0.09.

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

Meanwhile, SOUN updated its 2024 full-year revenue guidance to a range of $65 million to $77 million. Furthermore, the company aims to: Achieve adjusted EBITDA profitability by 2025We expect even greater growth, including exceeding $100 million in sales.

Slowing profitability

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

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

high valuation

Based on SOUN’s EV/sales, it is trading at 21.93x, 657.9% higher than the industry average of 2.89x. Likewise, the stock’s forward price/sales ratio of 23.62x is significantly higher than the industry average of 2.96x. Additionally, its 12-month trailing price/book multiple is 10.61, which is 234.4% higher than the industry average of 3.17.

conclusion

SOUN’s position as a global leader in AI-based voice applications and strategic initiatives enable continued growth in this rapidly growing market. The company’s innovative AI-based products, strategic partnerships with Perplexity and NVIDIA, and the recent acquisition of SYNQ3 accelerate market expansion across the automotive and restaurant segments, providing opportunities for revenue diversification.

Despite impressive revenue growth in the first quarter of 2024, SoundHound is facing profitability challenges, including widening losses and shrinking margins. Continued losses and cash burn may erode financial resources and investor confidence.

Analysts expect SOUN’s revenue to increase to $70.52 million and $103.35 million in 2024 and 2025, respectively, up 53.7% and 46.6% from the previous year. However, the company is expected to report losses for at least two fiscal years. Moreover, SoundHound has disappointed, failing to beat consensus EPS estimates in three of the last four quarters.

SoundHound’s valuation metrics, such as forward EV/sales and price/sales ratio, indicate a premium compared to industry peers. Higher valuations often result in higher volatility and greater susceptibility to market corrections. This is especially true if the company is not meeting growth expectations or struggling to achieve profitability.

Investing in SOUN therefore implies a mix of potential risks and rewards that investors must consider. While the company is demonstrating strong revenue growth and market leadership in the voice recognition segment, notable challenges include significant losses, rapid cash burn, and an expanding valuation.

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