Despite its small size, both the AI industry and investors have been taking notice of SoundHound AI (SOUN 5.77%), which produces voice recognition software and has landed several high-profile clients.
But the company has often struggled with low revenue growth and high expenses, and the question for investors is whether the AI stock's potential overrides financial concerns.
The state of SoundHound AI stock
SoundHound's voice recognition software has attracted clients such as Snap and Mastercard and it has become particularly popular in the automotive industry. Clients such as Mercedes-Benz, Hyundai, and Honda turn to it to power the voice recognition systems in their cars and trucks.
And investors might like the idea of buying a small-cap stock with growth potential. At a market cap of just over $530 million, the company has plenty of room to grow.
Still, SoundHound's history might have investors questioning whether it can grow its market cap by leaps and bounds. The company has existed since 2005, and its initial focus was music recognition software. It stayed in that vertical until launching its AI-enabled voice recognition software in 2015, and gradually built the client base that benefits the company today.
The company remained private until a special purpose acquisition company (SPAC) bought it in April 2022, taking it public. Since that time, the stock is down by 70%.
NASDAQ: SOUN
Key Data Points
SoundHound, financially speaking
SoundHound's financial position is likely a significant factor causing its falling stock price. Its revenue of $29 million in the first nine months of 2023 was 33% larger than the same period in 2022, however, operating expenses were nearly triple revenue. Consequently, the company's net loss was $71 million in the first three quarters of 2023, better than the $86 million loss in the same time frame last year, but still not good.
In fairness, the financials have improved somewhat. In the third quarter, expenses were just in excess of double revenue. Unfortunately, that might not be enough improvement to draw investors.
Furthermore, even though the company's forecast indicates revenue could double year over year in the fourth quarter, that might not be sufficient to boost confidence in the company amid other financial struggles. One problem is its long-term debt, which, at more than $83 million, far exceeds the company's $26 million in stockholders' equity. And that debt could make it difficult to attract more financing, particularly with interest rates rising significantly in recent months.
SoundHound AI has also been increasing its share count. The number of outstanding shares has already grown 23% so far this year to around 247 million. The current rate of share issuance likely has a chilling effect on potential share price growth. Also, at a price of just over $2 per share, such a move is unlikely to raise the needed capital.
Investors must also pay a price-to-sales (P/S) ratio of about 12 for the stock and that is a high sales multiple given the company's poor financial picture.
Avoid SoundHound AI stock
SoundHound AI has developed intriguing technology and fostered an impressive client list. Unfortunately for long-term investors, this is unlikely to make up for the company's numerous financial challenges.
Even with early indications of revenue improvement, the company lacks an obvious path to profitability. Moreover, high debt levels and share issuances make share price growth less likely. Under such conditions, investors are unlikely to beat the S&P 500 with this stock.
