After years of struggle, SoundHound AI (NASDAQ: SOUN) seems to have found its place in the tech industry. As the company settles on becoming a leader in voice recognition software, it has won contracts from various companies and an investment from AI chip leader Nvidia .
Despite those successes, SoundHound faces ongoing losses and significant difficulties on the financial side of the business. Given the severity of those challenges, investors and analysts appear to have taken an overly bullish stance on the SaaS stock .
The state of SoundHound AI stock
The company's $1.6 billion market cap makes SoundHound AI a small-cap stock. However, despite its size, companies as varied as Qualcomm , Stellantis , and Netflix have contracted with the company.
It was this customer portfolio that inspired Nvidia to invest in SoundHound stock. Investors seemed to become even more optimistic after learning the company would introduce a voice recognition product powered by Nvidia Drive, a hardware and software platform designed to power autonomous vehicles. In June, five of seven analysts rated SoundHound a strong buy or a buy, with none issuing a sell recommendation.
Admittedly, such a partnership appealed to investors and offered significant help to SoundHound AI stock, at least for a time. When news of the investment broke in March, other investors bought into SoundHound AI stock, which rose to an intraday high of $8.91 per share, its highest point in nearly two years.
Nonetheless, even that deal was not enough to sustain its stock price growth. A little more than a month later, SoundHound had fallen to nearly $3.50 per share, and even with a revival, it sells for around $5 per share at the time of this writing.
Despite its attributes, SoundHound seemed to have overlooked its formidable competition. Apple , Alphabet , and Amazon each have cash positions far larger than SoundHound's market cap, calling into question whether it can compete in the long term.
SoundHound AI's financial struggles
Despite the stock's difficulties, its growing customer and partner base helped its top line. In the first quarter of 2024, revenue of $12 million increased by 73% annually, a dramatic improvement over the 47% yearly revenue gain in 2023.
Still, analysts may have ignored the fact that the positive financial news appears to end there. SoundHound's operating expenses for the same period amounted to just over $40 million, almost 3.5 times higher than its revenue. After adding in $4 million of additional expenses, its Q1 net loss was $33 million, an increase from $27 million in the year-ago quarter.
Amid its losses, SoundHound held about $212 million in cash at the end of Q1. Regrettably, it had to significantly dilute its shareholders to build that cash. Currently, the number of outstanding shares tops 329 million, but at the end of 2022, this number stood at just 198 million. This means it increased the number of available shares by 66% in 15 months, significantly devaluing the holdings of its investors.
Moreover, those diluted shares appear significantly overvalued. As a money-losing company, it does not have a P/E ratio , and even with its movements, SoundHound AI still sells at a price-to-sales (P/S) ratio of 24. While not at its highest level, paying such a sales multiple for a stock with little hope of earning a profit makes SoundHound a high-risk holding.
Avoid SoundHound AI stock
Although an impressive client base and an Nvidia partnership might stoke some optimism in SoundHound AI, the stock remains highly risky.
Even with key partners and high analyst ratings, the company spends more than three times its revenue in costs and expenses to continue its operations. Also, to raise enough cash to keep its doors open, it has had to heavily dilute its shareholders. Even worse, such drastic actions may not be enough to help it compete with its well-funded peers.
Given the above conditions, the risks probably exceed any potential reward with SoundHound AI stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has positions in Qualcomm. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Nvidia, and Qualcomm. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy .
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