Shares of SoundHound AI (SOUN 5.77%) fell 21.7% in January, according to data from S&P Global Market Intelligence. The maker of voice control systems and other computer interfaces built on artificial intelligence (AI) and the human voice ran into some unexpected competition -- and investors were generally wary of unprofitable growth stocks last month.
In the final analysis, economic flutters explained most of SoundHound AI's January drop, largely in lockstep with stocks such as C3.ai (AI 3.02%) and IonQ (IONQ 9.66%). Like SoundHound AI, these companies are deeply unprofitable and focused on extreme growth opportunities in promising but risky technology markets. Enterprise-class AI services provider C3.ai closed January's trading 13.7% lower, while quantum computing pioneer IonQ fell 17.1%.
Why many tech stocks felt the chill in January
These three companies rose and fell in nearly perfect harmony. SoundHound AI stands apart because of a sharp drop on Jan. 9, when two competitive headwinds pushed the stock 11% lower.
Longtime SoundHound AI customer BMW signed a voice assistant deal combining Amazon Alexa with Amazon's large language model (LLM), seemingly leaving the existing SoundHound assistant out of the equation. The same day, a startup giving away free big-screen TV sets financed by a second screen with a constant stream of advertising selected ChatGPT to power its "Hey Telly" voice controls. The BMW announcement is clearly the harder jab to SoundHound AI's business prospects, but the Telly setback shows that AI platforms like ChatGPT can provide head-to-head competition for the Houndify system.
Investors started to forget about these unexpected challenges over the following week, letting C3.ai's and IonQ's stock charts catch up to SoundHound AI's pain level. The broader decline started with a gloomy earnings report from South Korean tech giant Samsung, followed by a mixed bag of tech-giant earnings as the first earnings season of 2024 kicked off.
None of these companies reported earnings last month. C3.ai has slated its third-quarter release for Feb. 28 and the other two haven't even announced their earnings dates yet.
The financials behind the fall
I'm talking about a bunch of risky businesses here. The three companies about are growing sales at an annual rate of 17% or more, and IonQ's highly experimental quantum computing systems racked up a 122% revenue jump in the latest reported quarter. But their after-tax profit margins are printed in crimson red, starting at a 92% net-loss margin for C3.ai and dipping all the way to negative-681% for IonQ. It's not a tax-avoidance trick, either -- each company burned at least $75 million of cash over the past four quarters.
These companies are keeping the lights on with stock-based compensation policies, new debt, and use of their cash reserves. It's not surprising to see Wall Street slapping their stocks down on the slightest hint of increased risks.
That being said, the negative bottom-line figures are not always deal-breakers for growth investors, who prefer to focus on the generous sales growth and better days ahead.
IonQ looks particularly risk-burdened, chewing through more than twice its current cash balance in negative free cash flows over the last year -- but at least the company is debt-free so far.
C3.ai's annual cash burn is approaching its cash equivalents, but its margin is improving and there's no debt on this balance sheet, either. The ongoing AI boom may very well lift C3.ai into a more sustainable financial situation in 2024.
SoundHound AI's cash-to-debt balance is less robust, with an annual cash burn nearly depleting its entire cash reserve and an existing loan balance in the same range. I really like SoundHound AI's impressive and growing customer list, and its top-line revenue trend is accelerating higher -- but I'll admit that it's a risky investment, and I can't blame nervous market makers for dropping its lofty stock price in January.
Now you know why SoundHound AI, IonQ, and C3.ai took painful haircuts last month. All three seem to have impressive turnaround prospects from these prices, ranging from 70% to 90% each stock's all-time highs. But these volatile growth stocks are not every investor's cup of tea, and you should consider them only if you don't mind an elevated level of market risk.
