SoundHound AI's Business Is Soaring, But Does That Make The Stock A Buy? | Old North State Wealth News
Connect with us

Economy

SoundHound AI’s Business Is Soaring, But Does That Make the Stock a Buy?

Published

on

Artificial intelligence (AI) is making its way into more services by the day. One area that is witnessing some attention at the moment is the intersection between voice and AI.

Smart assistants aren’t really that new, though. Apple integrated Siri into its hardware devices more than a decade ago. Moreover, smart-home devices from Amazon and Alphabet‘s Google have been a favorite among consumer electronics enthusiasts for years.

Nevertheless, perhaps the company that is receiving the most attention in AI-powered voice applications is SoundHound AI (NASDAQ: SOUN).

Shares of the budding software developer are up 138% so far this year. Moreover, the company just reported impressive earnings for the first quarter of 2024, which ended March 31.

Let’s dive into the financial results and assess if SoundHound represents a lucrative investment opportunity.

Voice and the next frontier of AI

AI-powered voice products are more prolific than you probably think. In addition to Internet of Things (IoT) devices, voice recognition can play an important role in vehicles, fulfilling orders at restaurants, customer service applications, gaming, and more.

According to research compiled by Fortune Business Insight, the addressable market for voice-recognition AI tools is expected to reach $50 billion by 2029, a fourfold increase from its estimated size just two years ago.

Image source: Getty Images.

SoundHound AI’s revenue is soaring…

For the first quarter of 2024, SoundHound AI increased revenue 73% year over year. While this looks impressive on the surface, bear in mind that its sales were only $11.6 million.

Considering management is calling for revenue to be in the range of $65 million to $77 million for all of 2024, it’s clear that the company is still quite small.

Moreover, despite its revenue acceleration, it is burning cash at a higher rate. During the first quarter, the company reported operating losses of $28.5 million. By comparison, SoundHound AI’s operating loss was $25.2 million during the first quarter of 2023.

These losses flowed down to the bottom line, as SoundHound AI’s net income and earnings before interest, taxes, depreciation, and amortization (EBITDA) both fared worse in the latest first quarter compared to the same period last year.

Yet the stock remains pricey and questions linger

There was one part of the earnings report that gave me some hesitation when it comes to buying shares in SoundHound.

The company ended the quarter with $226 million in cash and equivalents on the balance sheet. This is by far SoundHound’s highest cash balance as a public company. Although this implies strong liquidity, there is more to it than meets the eye.

SOUN Cash and Equivalents (Quarterly) Chart

SOUN Cash and Equivalents (Quarterly) Chart

Filings show that the company sold $137 million worth of stock during the first quarter. In other words, given the stock price was rising quickly in a relatively short time frame, management decided to sell shares in order to raise capital.

While there is nothing inherently wrong with this approach, keep in mind that when management decided to sell shares, investors were the ones buying into this momentum. Therefore, anyone who purchased shares during the first quarter likely did so at an inflated price.

Moreover, the company won’t be able to resort to stock sales forever. Eventually, it is going to need to prove that it can turn a profit and generate consistent cash flow. If not, investors will eventually sell the stock and the price will plummet.

As of the time of this article, SoundHound AI has a market capitalization of $1.7 billion and trades at a price-to-sales (P/S) ratio of 24.8. By comparison, the P/S of the S&P 500 is 2.5.

Considering SoundHound is nowhere near the size of the companies in the S&P 500, I think its valuation is a bit rich. Furthermore, given the rising number of competitors in the voice-recognition pocket of the AI realm, I’m skeptical of the company’s long-term prospects.

I see this as a company developing interesting technology. But as far as investment prospects are concerned, I think there are too many risks associated with the business.

The stock is overvalued, and buying shares at this level comes with outsize risk. I think an investment in SoundHound AI is speculative, and I see much stronger opportunities in the AI landscape from larger, more established companies.

Should you invest $1,000 in SoundHound AI right now?

Before you buy stock in SoundHound AI, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $635,982!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 13, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, and Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, and Apple. The Motley Fool has a disclosure policy.

SoundHound AI’s Business Is Soaring, But Does That Make the Stock a Buy? was originally published by The Motley Fool

Read the full article here

Trending

Copyright © 2022 ONSWM News. Content posted on the Old North State Wealth News page was developed and produced by a third party news aggregation service. Old North State Wealth Management is not affiliated with the news aggregation service. The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date the articles were published. The information presented is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities discussed.