Finding stocks under $10 isn't easy anymore. In the days of fractional share brokerages, companies care less and less about the actual dollar figure of the stock, only that it goes up. This can make it difficult to find companies that fit the bill for a certain sector investors want to participate in.
Fortunately, SoundHound AI (SOUN -0.98%), an artificial intelligence (AI) company, is trading under $2 right now, meaning you can purchase five shares for just $10. But there's more to an investment than just a cheap stock price. So, should you buy shares? Let's find out.
SoundHound recently announced a partnership
From the name, it's pretty easy to infer that SoundHound AI has something to do with AI and audio. This is an excellent guess as SoundHound is focused on translating voice information into usable data. This can be used to create advanced virtual assistants, transcribe text to speech, or recognize copyrighted content. Through the combination of speech recognition and natural language understanding, SoundHound AI creates a more efficient and accurate result with endless use cases.
Recently, SoundHound AI partnered with Samsung and White Castle (the fast food restaurant) to create AI-powered drive-thru menu boards at restaurants. Through pilot programs, SoundHound AI achieved process times of under 60 seconds with 90% order completion, outperforming its human counterparts. While this may not be a big deal as a one-off announcement, if this technology proves valuable, it's not hard to see it implemented in every fast-food restaurant, especially if it improves margins.
It is also working on a project to integrate car manuals into a car's virtual assistant. This will allow users to ask the vehicle any questions they might have on why an indicator light is on or how to perform a maintenance step.
SoundHound AI is a very early-stage company, and its products have a lot of potential. Still, it's hard to understand which innovations could be game-changing ones and which are just cool technologies that don't add much value. But SoundHound's revenue has been growing as more of its products become integrated.
SoundHound AI is losing a lot of money
SoundHound AI only brought in $8.8 million in revenue during the second quarter, but it rose 42% year over year, indicating strong growth. However, it has a substantial business backlog with $339 million in revenue already booked for the future. This is critical for SoundHound as it must continue to grow to reach profitability.
In Q2, its operating expenses totaled $25 million, which resulted in a $16 million operating loss. That's a significant burn rate, especially considering that SoundHound had to secure $100 million in debt financing in April and $43 million in equity to keep its cash balance high enough to continue operations. In the first six months of 2023, SoundHound burned around $34 million in cash. So, with its current $116 million balance, it has under two years to operate at its current pace before it will need to seek more funding.
SOUN Operating Margin (Quarterly) data by YCharts.
Most of the time, companies this young aren't on the public markets. However, the SPAC (special purpose acquisition company) boom in 2020 and 2021 gave SoundHound that opportunity.
This makes an investment in SoundHound AI quite risky, and investors shouldn't take a position in the stock unless they are prepared for it to conceivably go to zero. As a result, it's best kept to a minimum position size in a portfolio (no more than 1% of total funds). But if SoundHound AI can become a dominant force in its industry, that small 1% investment could grow to become a sizable chunk of a portfolio.
