Audio and artificial intelligence (AI) company SoundHound AI (SOUN -5.52%) is an intriguing company for investors who are hunting multibagger stocks that can deliver life-changing returns. It's only worth $1.8 billion, which leaves plenty of room for growth over time.
The company specializes in a niche category, audio AI applications. AI giant Nvidia even invested in the company. These positives certainly get your attention. But is SoundHound AI capable of delivering those types of returns? Anything is possible, but some things are working against it.
Here is what you need to know about SoundHound AI's long-term investment potential.
Competition with deep pockets
SoundHound AI develops conversation-based artificial intelligence technologies, including intelligent answering and interactions, intelligent ordering, and AI chat, which functions like a virtual assistant. The company started in the automotive and restaurant space but aspires to expand to broader applications.
Management cites an addressable market that will grow to $160 billion by 2026. Target end markets include the financial sector, contact centers, hospitals, e-commerce, and more. SoundHound has approximately 260 patents granted or pending, but that hasn't prevented competition from entering the space.
SoundHound competes with several prominent technology companies, including Microsoft and Alphabet. Just because a company is bigger doesn't mean the product is better. However, companies like Microsoft and Alphabet have brand power and a suite of products they can bundle. In other words, it's easier for many customers to include a niche product like this with the other products they buy from these companies.
After all, SoundHound AI has only generated $46 million in revenue over the past four quarters. This is a tiny company. Millionaire-maker stocks generally start small, but the odds favor SoundHound AI's larger and deeper-pocketed competitors.
Dilution could hurt investors
Another strike against the stock is that the company isn't well funded. The company has had to continually issue more shares to raise money, which has increased the share count by 57% since the company went public in 2022.
When the number of shares increases, profits are spread thinner. That means each share is worth a smaller piece of the business and has a lower intrinsic value. A company can grow leaps and bounds, but it won't matter if it keeps issuing shares.
SOUN Cash and Short Term Investments (Quarterly) data by YCharts
The company isn't cash-flow-positive yet. SoundHound AI burned about $14 million last quarter, giving the business about 18 months of cash at that rate. The company's $84 million in long-term debt doesn't help. Ideally, a budding, unprofitable business wouldn't have any debt.
Shares are expensive
Finally, shares are pricing in success which hasn't happened yet. The stock trades at a price-to-sales ratio of 29, a hefty price tag for a business with debt and no profits. Revenue did grow 80% year over year last quarter, but investors should look to see how long that growth rate continues. The growth rate is excellent, but it's also a small base at just $46 million.
An AI company like SentinelOne isn't growing as fast (revenue grew 38% year over year last quarter), but it's growing a much larger base number. The business is well funded with cash and zero debt, and that stock trades at a P/S ratio of less than 9.
SOUN Revenue (TTM) data by YCharts
It's not that it won't succeed, but SoundHound AI is a risky stock, and investors are being asked to pay quite a bit to take that risk.
Is SoundHound AI a millionaire-maker?
A millionaire-making stock often starts small and unknown and makes a name for itself, delivering massive growth and returns. It catches Wall Street off guard. Is SoundHound AI catching the market by surprise? The stock is worth $1.8 billion on less than $50 million in revenue, so it's hard to say that.
SoundHound AI would have to become a large company from its current size to single-handedly make you a millionaire. Multibaggers don't grow on trees. Investors who want tenfold returns or more might be better off looking for better opportunities elsewhere.
