When it comes to artificial intelligence (AI), companies such as Microsoft, Alphabet, and Amazon may come to mind first. However, there are plenty of under-the-radar AI opportunities floating around. One such company is SoundHound AI (SOUN +1.88%). You may be familiar with the company if you're a music lover. It developed the music recognition app SoundHound as well as a number of other voice-recognition tools.
After going public through a special purpose acquisition company (SPAC) in 2022, the stock has cratered from a high of nearly $15 last May to its current price of $1.70. With the stock trading at such deflated levels, some investors may view it as too big a risk.
However, a closer look leads me to believe that SoundHound has some pretty lucrative growth prospects. While there are some inherent risks affiliated with an investment, now could be an opportunity to buy the dip in this misunderstood AI player.
What does the company do?
At its core, SoundHound AI specializes in natural language processing. The company's technology is able to recognize and process speech, a solution that can be deployed across various use cases. For example, automakers such as Stellantis and Hyundai use SoundHound's generative AI to help create customized experiences for drivers.
Moreover, there is a huge opportunity with the Internet-of-Things market as it pertains to smart-home appliances. Both Qualcomm and Snap have partnered with SoundHound for IoT initiatives. Restaurants also represent another big market as voice-enabled assistants can help with food ordering and bill pay. For this reason, it's not surprising to learn that point-of-sale system Toast and Square (owned by Block) are both running on SoundHound AI.
While the client roster above is certainly impressive, some investors may be wondering about one glaring issue: competition. SoundHound competes with the likes of Apple's Siri, Amazon's Alexa, Microsoft's Nuance, and Google's voice assistant. While this is a legitimate concern, SoundHound estimates that its total addressable market is $160 billion. I view this as large enough for multiple winners to emerge. Additionally, I'd argue that AI-powered voice assistants are merely tangents of Big Tech, and not necessarily core product offerings.
Lastly, one of the biggest selling points of choosing SoundHound AI over its Big Tech cohorts is that the company's products can be purchased à la carte. Big Tech firms such as Apple may not offer the same level of flexibility. For example, if a restaurant chose to deploy Siri over SoundHound, it's highly likely that Apple would try to integrate additional products and services such as iPads and Apple Pay to control the point-of-sale process as well. In theory, this may not be how the restaurant chain wants to run its business.
The rigidity factor that often comes with working with Big Tech is a big differentiator for SoundHound. The company refers to itself as an "independent platform" that provides its customers with a level of flexibility that Big Tech doesn't often match.
Image source: Getty Images.
How is the financial and operating picture?
Investors should note that SoundHound is still a very small company. It reported total sales of $8.8 million for the latest quarter -- and $36 million for the last 12 months.
Second, like many of its tech cohorts, SoundHound was no stranger to extreme reductions in operating spending over the last several months. Unfortunately, the company resorted to layoffs in an effort to reduce costs and extend its cash runway. While its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has improved by 50% compared to last year, the business is still operating at a net loss.
While SoundHound carries over $115 million of cash on the balance sheet as of June 30, investors should keep a keen eye on its liquidity position after Q3 earnings are published later this month. The company does have access to a credit facility but it's crucial that investors monitor how much debt SoundHound may be drawing on.
NASDAQ: SOUN
Key Data Points
Taking a look at valuation
Given how much the stock has fallen, coupled with its somewhat fragile financial profile, some investors may have seen enough to walk away. To me, there are a couple of potential outcomes here.
First, the market for mergers and acquisitions has really cooled off over the last year as companies have focused more on internal operations. But given its current valuation, it's not out of line to speculate that SoundHound could be a takeover target -- similar to some of its peers. However, I would not personally invest in a stock purely based on its buyout candidacy.
From my stance, I think investors need to be thinking about the bigger picture. SoundHound operates in a huge market that isn't particularly dominated by one player. Moreover, the use cases for voice-enabled AI are still playing out given how nascent the technology is. I think that many investors soured on SoundHound and reallocated capital elsewhere.
But with many Big Tech stocks beginning to take a breather, I'd argue that SoundHound is overlooked and potentially undervalued. For investors looking to build exposure to artificial intelligence opportunities that do not require the same premium of higher profile companies, SoundHound AI could be an interesting way to augment a diversified portfolio.
