Every investor dreams of investing a little bit of money and catching a massive long-term winner. After all, the very best-performing stocks can go up five, 10, or even 100 times or more over time.
One of the places to look for multibaggers these days is in disruptive artificial intelligence companies that go after massive addressable markets. But while many large, well-known AI companies have already been given massive market caps and valuations, there are some smaller emerging players that also have big opportunities.
One is SoundHound AI (SOUN 5.77%), a leader in conversational intelligence, which sports a market cap of just over $500 million today.
With a small size and big potential opportunity, SoundHound could be a millionaire-maker stock. But is it worth the risk?
The big opportunity for SoundHound
While SoundHound has only been a public company for about 18 months, the company has actually been around since 2005. It was started by two Stanford graduates with the goal of bringing conversational intelligence to many applications, and that central goal and task hasn't changed for 18 years.
SoundHound began as a music identification app akin to Shazam, but in 2015, the company launched its Houndify Voice AI platform that could embed voice-based interactions into consumer devices such as automobiles, smart TVs, IoT devices, and other applications seamlessly and effectively. In 2022, SoundHound infused its platform with an upgrade called Dynamic Interaction, which allowed its computer platform to understand and respond to voice prompts in real time. And the whole platform got another upgrade this year as SoundHound infused its platform with more generative AI upgrades called SoundHound Chat AI.
Although SoundHound is up against big tech competitors, its neutral position and history concentrating only on conversational AI has landed it many high-profile customers. These include car manufacturers Stellantis and Hyundai, social media platform Snap, fast food chain White Castle, and leading streaming service Netflix.
SoundHound believes it not only has a technological advantage bolstered by over 260 granted and pending patents, but that it also has a massive $160 billion addressable market. That market opportunity may be a stretch, but one can certainly envision a fairly large market by the end of this decade as speech recognition and interaction is incorporated into more and more devices.
To that end, SoundHound continues to ink new partnerships, and its existing partners, especially in the automotive field, will likely produce more and more models every year with its advanced technology. While SoundHound's trailing revenue is only $38.2 million, the company also points to its $341 million in backlog bookings, which incorporate revenue to be recognized in the future from existing contracts.
SoundHound says its contracts typically span three to five years but may take a few different forms: licensing based on the number, price, or usage of items sold with the technology, recurring subscriptions, or a commission rate when a customer uses SoundHound that leads to an eventually purchase.
Given its adoption by a wide array of big-name customers, its growing backlog, and an apparently large potential market, it's no wonder some consider SoundHound a potential millionaire-maker.
SoundHound AI is an early stage AI stock with potential. Image source: Getty Images.
But there are too many red flags to be confident in SoundHound
While SoundHound definitely has intriguing upside potential, ultimately, there are also several red flags and risks keeping this investor on the sidelines.
For one, even though SoundHound says it has such a large addressable market, revenue and backlog growth has slowed markedly this year. Entering the year growing at some 80%, growth has slowed to just a 19% rate in the recently completed quarter, with its backlog growth slowing to just 13% year over year.
SOUN Revenue (Quarterly YoY Growth) data by YCharts
It's not quite clear why there has been such a big slowdown, but it could be a number of things either in isolation or in combination.
One, obviously the macroeconomic environment has been quite uncertain, perhaps leading to companies slowing investment in next-gen features such as AI voice assistants. Two, the slowdown could also be attributed to a number of generative AI start-ups that may be finding favor in competition with SoundHound. After all, last year's unveiling of ChatGPT seemed to usher in a new era of capability for start-ups and big tech alike -- one that may enable these companies to make comparable voice assistants.
Third, the slowing environment has forced SoundHound to cut back on research and development and sales and marketing investments. In the past quarter, SoundHound cut overall operating expenses by 27%. While that was perhaps the right move in light of SoundHound's operating losses, which still totaled $14.5 million last quarter even with those cuts , those OpEx cuts may also be a factor behind decelerating growth.
Finally, another reason to be wary of SoundHound is that it came public in 2022 via a special purpose acquisition company, or SPAC. SPACs became very fashionable in the post-pandemic meme era when interest rates were very low, and are thought to mostly be companies that didn't have the validity or track record to go public through the IPO process. Unsurprisingly, many SPACs have underperformed or gone bankrupt. Now that the market seems to be aware of SPACs' notorious recent history, it may be tough for SoundHound to get a higher valuation without sustainable profitability.
For SoundHound, its stock currently sits about 80% below its initial SPAC price of $10 less than two years ago.
SoundHound is risky, but keep an eye on it
SoundHound has enough risks these days that it's currently a stock likely best outside of your portfolio, unless you are an extremely aggressive investor that can tolerate a total loss. Nevertheless, there is enough intriguing potential for investors to monitor the stock going forward. The company has signed up several impressive clients, and we do seem to be at the beginning of the AI age.
Nevertheless, competitive concerns, its relatively small balance sheet, and ongoing losses are enough to keep it a watchlist-only stock now for this investor.
