It's not often you can find stocks that Wall Street analysts think will double in the next year, but that's exactly what I've found with SoundHound AI (SOUN 3.48%). While the stock trades for around $2.10 now, an average of five analysts have a one-year price target of $5.
That's an incredible upside for SoundHound AI's stock, but is the company worth an investment?
A merger is shaking things up
SoundHound AI does exactly what it sounds like: It provides artificial intelligence (AI) solutions for voice. Right now, SoundHound's primary customers are restaurants, although it has other applications suited for automobiles, smart devices, and call centers.
SoundHound's products can help take mobile orders from restaurants placed with a phone call or operate a drive-thru kiosk. That's exactly what SoundHound teamed up with White Castle (the burger chain) to do. By implementing its AI-powered ordering system, SoundHound helped White Castle implement a system that has a 90% order completion rate and processes orders in less than 60 seconds. Both of these measures surpass the human benchmark, making it not only a replacement but an improvement as well.
White Castle is a small chain compared to others, and if big-time restaurants teamed up with SoundHound AI, it could send the stock skyrocketing.
But SoundHound isn't sitting around waiting for suitors to come to them. Instead, it recently announced an acquisition of SYNQ3. SYNQ3 has partnered with several restaurant chains and will further expand SoundHound's reach into this space.
This is a complementary acquisition and will further accelerate SoundHound's expansion in the restaurant space.
Still, investing in SoundHound is far from a sure bet.
SoundHound's clock is ticking
SoundHound's deal with SYNQ3 will cost about $25 million over the next three years, with the final figure being determined by the success of the combined entity. The deal will be funded through 20% cash and 80% stock, so it will only reduce SoundHound's cash balance by about $5 million.
This is critical, as SoundHound is far from profitable.
In the third quarter, SoundHound grew revenue 52% year over year to $13.3 million. Despite shrinking its operating expenses from $38.3 million to $28.8 million in Q3, it still posted a $14.5 million operating loss. This makes cash burn an important factor for determining if SoundHound AI is worth an investment. SoundHound has used around $54.4 million in cash in the past nine months, giving it a burn rate of about $18.1 million each quarter.
SOUN Operating Margin (Quarterly) data by YCharts
As of Q3, the company had about $110 million in cash. This gives SoundHound a bit over a year to operate before running out of cash.
However, it can easily raise funds, as the company's bookings are impressive. Over the past 12 months, SoundHound has produced revenue of $38.2 million. But it has a $342 million backlog on its books, so SoundHound AI already has contractual growth on paper.
This is a key factor, as it shows investors that SoundHound has products customers want; it's just working on upscaling and implementing its technology. As a result, SoundHound AI could be a great AI investment.
But if you choose to invest in SoundHound, it's best to keep the position size small, as it could easily go under. On the other hand, if it grows into a sizable business, that small position will quickly transform into a notable one.
