SoundHound AI stock (NASDAQ:SOUN) has courted controversy since the company went public in the year 2022. SOUN has not been without some troubles, with some short sellers claiming the business has “fake revenue, fake bookings, and fake AI”.
Furthermore, being one of the first companies that offered purely voice AI solutions, SoundHound is now among the leaders in this fast-growing AI market. However, the valuation and overall legitimacy of the stock has been somewhat up for debate — is SoundHound AI an undervalued sleeping giant, or simply a player in a very competitive space?
For the sake of clarity and balance, I don’t have a pony in the race here, as I’m on the fence with the rest of you. So I will explore three different perspectives, namely from those who are bullish, neutral and who think SoundHound AI makes for an easy sell case. Let’s get started.
Overvaluation Risks but Still Promising
Exploring the hold thesis first, SoundHound AI stock has a great opportunity for growth but looks quite overvalued to many. While the company reported an impressive 73% growth in revenue in Q1 2024, total revenue remains under $20 million per quarter. It suggests its market share in the $3.8 billion voice AI industry is still quite small.
It is also important to note that the competitive environment is rather saturated. The company also seems to have rather low barriers to entry that make me doubt the ability of SoundHound AI stock to defend its position in the market. SoundHound will find it difficult to retain its current market share in the future.
AI voice technologies are quickly becoming commoditized, making it hard to establish a durable competitive advantage. Further, it is just its code and technical know-how that separates it from other businesses. It would take just one data breach or bad apple at the company for its IP and secrets to be leaked for all to see. I think that underscores what little there is to make it a true winner.
Succeeding In the Real World
On the bullish side, SoundHound AI stock has proven to be a strong player in the AI market. It has achieved some real-world success, which contrasts with many of the convoluted hypotheses bears offer regarding it. SOUN has also teamed up with other AI companies.
A perfect example of the company’s strategic moves is the recent integration of its SoundHound Chat AI with the Perplexity AI large language model. This should enhance the platform’s capability of facilitating real-time conversations. It places SoundHound AI stock in a position to grab more of the voice AI market.
SoundHound has especially been praised for its collaboration with Nvidia (NASDAQ:NVDA). The cooperation to implement generative AI at the edge without relying on a cloud connection is expected to strengthen the company’s position in the automotive market. That is a prime one for its AI voice capabilities. Particularly because newer vehicles are making increasing use of technology, it positions SoundHound for growth.
Making a Strong Sell Case
SoundHound AI stock produces heavy losses. It reported a net loss of $94.70 million in the last 12 months on revenue of just $50.76 million. This amounts to a rather shocking net profit margin of -186.56%. The company’s valuation appears stretched, with a price-to-sales ratio of 32x, suggesting investor expectations may be unrealistic.
SoundHound’s cash flow is a bit troubling with negative free cash flow of $76.22 million. Despite this, the company has $211.74 million in cash. Normal business operations, however, could wipe out this buffer in a short time.
Due to its high cash burn rate, Soundhound AI stock rapidly expanded its number of shares outstanding. They increased by 39.75% year-over-year, potentially diluting existing shareholders.
SOUN will need to raise additional capital through debt or equity based on its cash burn forecasts. This risk in addition to its lack of a perceived moat and already high valuation could be reason to consider selling this stock.
Still, my recommendation for investors is to hold this stock because it is making substantial progress operationally. Carving out a durable competitive advantage (perhaps via a deeper integration with its partners) will be crucial to ensure its tech can’t be stolen or reverse-engineered. A wait-and-see approach is also prudent for bulls due to it trading at historically high valuation multiples.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.