SoundHound AI (SOUN -1.17%) once seemed like a promising play on the artificial intelligence (AI) market. Its Houndify developer platform enabled companies to add speech recognition tools to their products without tethering themselves to a tech giant like Microsoft or Alphabet's Google. It also developed its own voice-powered digital assistant and music recognition app.
So when SoundHound AI finally went public by merging with a special purpose acquisition company (SPAC) last year, the bulls rushed in. It closed its merger on April 28, 2022, and the combined company's stock started trading at $8.72 per share. By May 5, it had rallied to an all-time high of $14.98. But today, SoundHound AI trades at less than $2 per share.
Image source: Getty Images.
Therefore, a $2,000 investment in SoundHound on its first trading day would have briefly blossomed to more than $3,400 before withering to less than $400 today. Let's see why SoundHound's stock stumbled and if it's still worth buying.
Overpromising and underdelivering
Like many other SPAC-backed companies, SoundHound provided an extremely bullish long-term forecast during its pre-merger presentation in November 2021.
It claimed that between 2020 and 2026, it could grow its annual revenue at a compound annual growth rate (CAGR) of 112% from $13 million to $1.16 billion. It also predicted its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin would turn positive by 2024 and expand to 40.5% by 2026.
It initially seemed like it could achieve those ambitious goals. Its revenue rose 63% to $21 million in 2021, which surpassed its target of $20 million, and grew 47% to $31 million in 2022 and cleared its own forecast of $28 million. But for 2023, it only expects its revenue to grow 39%-61% to $43 million-$50 million in 2023, compared to its original forecast of $110 million.
Analysts still expect SoundHound's revenue to rise 47% in 2023, 62% in 2024, and 35% to $100 million in 2025 -- but it's now painfully obvious that the company grossly exaggerated its own growth potential.
Focusing on profitability instead of growth
SoundHound blamed its slowdown on macro headwinds that drove companies to spend less money on voice recognition services. It also faced stiff competition from Microsoft's Nuance, Google Assistant, and other platforms.
Rising interest rates then popped its bubbly valuations. At its all-time high, SoundHound's enterprise value reached $2.98 billion -- a whopping 96 times the revenue it would actually generate in 2022. It now has a much lower enterprise value of just $390 million, but it still isn't a screaming bargain at 9 times this year's sales.
SoundHound's lack of profits made it even less attractive in a high interest rate environment. It laid off nearly half of its workforce earlier this year and insists its adjusted EBITDA margin will turn positive by the fourth quarter of 2023, but analysts don't expect its adjusted EBITDA margin to turn positive on an annual basis until 2025. Therefore, its debt-to-equity ratio -- which hit 3.1 in its latest quarter -- will likely keep rising as it burns more cash.
Customer concentration issues and a murky future
SoundHound generated over two-thirds of its revenue from its top three customers in 2022. Losing just one of those customers to Microsoft or Google would be a disaster.
That's why it's troubling that SoundHound is aggressively cutting costs when it should be scaling up its business and diversifying its customer base. Its insiders have also sold nearly eight times as many shares as they bought over the past 12 months -- which suggests its stock still isn't undervalued relative to its near-term growth potential.
SoundHound might seem like a compelling takeover target for Microsoft or Google, but those tech giants might realize it's cheaper to expand their existing voice recognition technologies instead of integrating a tiny underdog.
Could SoundHound bounce back?
On the bright side, SoundHound is growing rapidly and won't run out of cash anytime soon. The global speech and voice recognition market could keep expanding at a compound CAGR of 25% from 2023 to 2030, according to Fortune Business Insights, so the company might have plenty of room to run over the next few years.
Unfortunately, SoundHound's broken promises, customer concentration issues, rising leverage, and narrow moat all make it a risky investment. It might be an interesting speculative play, but I don't think it's a value stock just yet.
