Is SoundHound AI Stock a Buy?

SoundHound AI (SOUN 8.52%) went public by merging with a special-purpose acquisition company (SPAC) on April 28, 2022. The audio and speech recognition company's stock started trading at $8.72 and rallied to an all-time high of $14.98 on May 5.

At the time, the bulls were dazzled by its rapid revenue growth and exposure to the expanding artificial intelligence (AI) market. However, it subsequently lost its luster as its revenue growth cooled off. Rising interest rates also cast a harsh light on its steep losses and popped its bubbly valuations. That's why its stock now trades at about $2. Should you buy this out-of-favor AI stock as the bulls look the other way?

Image source: Getty Images.

How fast is SoundHound AI growing?

SoundHound was founded in 2005 as a developer of speech recognition, natural language understanding, sound recognition, and voice search tools. Its core products include music recognition app SoundHound, voice-powered digital assistant SoundHound Chat AI, and the Houndify developer platform.

During its pre-merger presentation, SoundHound predicted that its revenue would rise from $13 million in 2020 to $20 million in 2021, and then grow to $28 million in 2022. It surpassed its own expectations by generating $31 million in revenue in 2022.

But that's where its ambitious estimates started to fall apart. It expects its revenue to rise 39% to 61% to $43 to $50 million in 2023, but that's well below the $98 million in revenue it had forecast during its SPAC presentation. It blamed that slowdown on the macro headwinds, which drove many of its enterprise customers to rein in their spending.

Its revenue growth has also decelerated over the past three quarters -- even though it's been expanding its gross margin while narrowing its losses on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

Data source: SoundHound AI. YOY = Year-over-year. *Reflects a one-time gain of $4.3 million in Q2 2021.

SoundHound's adjusted EBITDA losses are still steep, but it laid off nearly half of its workforce earlier this year, aggressively slashed its R&D spending, and expects its adjusted EBITDA margin to turn positive by the fourth quarter of 2023. Analysts expect it to narrow its adjusted EBITDA loss from $32 million in 2023 to just $3 million in 2024.

SoundHound won't run out of cash anytime soon, since it ended its second quarter with $116 million in cash and equivalents. However, its high debt-to-equity ratio of 3.1 could make it tough to raise fresh funds at favorable rates if its liquidity dries up.

Can SoundHound maintain its momentum?

SoundHound faces stiff competition from Microsoft's Nuance and Bing Chat, Alphabet's Google Assistant, Apple's Siri, and other voice recognition platforms. However, Fortune Business Insights estimates that the global speech and voice recognition market could still expand at a compound annual growth rate of 25% from 2023 to 2030 -- so there could still be plenty of room for all of those platforms to grow.

Working with SoundHound could also be a compelling choice for companies that don't want to tether themselves to one of those tech giants. That's why we've seen restaurants such as White Castle, automakers such as Hyundai, and smart-TV makers such as Vizio all teamed up with SoundHound over the past year.

The valuations and verdict

Analysts expect SoundHound's revenue to rise 47% to $45.6 million this year. At its current enterprise value (EV) of $496 million, it trades at 11 times that forecast. That EV/revenue ratio seems reasonable -- but not cheap -- relative to its current growth rate. For reference, hypergrowth cloud stock Snowflake, which is expected to grow its revenue by 33% in its current fiscal year, trades at 18 times that estimate.

That low valuation might make SoundHound a tempting takeover target for one of the big tech giants. But brushing all that speculation aside, I believe its stock will remain out of favor until its adjusted EBITDA margin actually turns positive. It's an interesting stock to keep an eye on, but I'd rather stick with more established AI plays in this tough market.