Artificial intelligence (AI) is finding its way into more services every day. One area currently receiving some attention is the intersection between voice and AI.
However, smart assistants are not that new. Apple integrated Siri into its hardware devices more than a decade ago. Moreover, there are smart home devices from it Amazon And Alphabet‘s Google has been a favorite among consumer electronics enthusiasts for years.
Nevertheless, this is perhaps the company that is getting the most attention in the field of AI-powered voice applications SoundHound AI (NASDAQ: SOUND).
The upstart software developer’s shares are up 138% so far this year. Additionally, 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 whether SoundHound represents a lucrative investment opportunity.
Voice and the next frontier of AI
AI-powered voice products are more productive than you probably think. In addition to Internet of Things (IoT) devices, voice recognition can play an important role in vehicles, restaurant order fulfillment, customer service applications, gaming and more.
According to research from Fortune Business Insight, the addressable market for AI voice recognition tools is expected to reach $50 billion by 2029, a fourfold increase from its estimated size just two years ago.
SoundHound AI’s revenues are soaring…
For the first quarter of 2024, SoundHound AI increased revenue 73% year over year. While this looks impressive at first glance, keep in mind that revenue was only $11.6 million.
Considering that management is calling for revenues between $65 million and $77 million for all of 2024, it’s clear the company is still quite small.
Moreover, despite the acceleration in revenues, the country is burning cash at a faster pace. During the first quarter, the company reported operating losses of $28.5 million. By comparison, SoundHound AI’s operating loss was $25.2 million in the first quarter of 2023.
These losses flowed through to the bottom line, as SoundHound AI’s net profit and earnings before interest, taxes, depreciation, and amortization (EBITDA) both underperformed in the latest first quarter compared to the same period last year.
Yet the share remains pricey and questions remain
There was one part of the earnings report that gave me some hesitation when it came to buying shares in SoundHound.
The company ended the quarter with $226 million in cash and equivalents on its balance sheet. This is by far SoundHound’s highest cash balance as a publicly traded company. While this implies strong liquidity, there is more to it than meets the eye.
Documents show the company sold $137 million worth of stock in the first quarter. In other words, since the stock price rose rapidly in a relatively short period of time, management decided to sell shares to raise capital.
While there’s nothing inherently wrong with this approach, keep in mind that when management decided to sell the stock, it was investors who bought into this momentum. Therefore, anyone who bought shares during the first quarter probably did so at too high a price.
Moreover, the company won’t be able to resort to stock sales forever. Ultimately, the company will have 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.
At the time of writing this article, SoundHound AI has a market capitalization of $1.7 billion and trades at a price-to-sales ratio (P/S) of 24.8. For comparison: the P/S of the S&P500 amounts to 2.5.
Since SoundHound isn’t nearly as big as the companies in the S&P 500, I think its valuation is a bit high. Furthermore, given the increasing number of voice recognition competitors in the AI world, I am skeptical about the company’s long-term prospects.
I see this as a company developing interesting technology. But in terms of investment prospects, I think there is too much risk associated with the company.
The stock is overvalued and buying shares at this level carries excessive risk. I think an investment in SoundHound AI is speculative, and I see much greater opportunity in the AI landscape of larger, more established companies.
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Suzanne Frey, a director 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 at Alphabet, Amazon and Apple. The Motley Fool holds positions in and recommends Alphabet, Amazon and Apple. The Motley Fool has a disclosure policy.
SoundHound AI’s business is soaring, but does that mean the stock is a buy? was originally published by The Motley Fool
