After a massive run higher earlier this year, SoundHound AI (SOUN 4.36%) stock has come back to earth. That correction included a decline of about 8% just today as of midday trading. Yet shares have still more than doubled in 2024.
Now that the momentum has eased, investors might be wondering if the stock-price decline is an opportunity to own a piece of the maker of voice artificial intelligence (AI) technology. Yet even as sales have been growing with more companies utilizing conversational AI Chatbots, the news that moved the stock today is the reason investors should pause before jumping into the stock.
Capitalizing on the growth of ChatGPT
The company said in a Securities and Exchange Commission filing that it had reached agreements to sell up to $150 million in stock to raise fresh capital. That's a meaningful amount of additional stock for a company with a market cap under $1.5 billion. The new at-the-market equity program could result in about 10% total dilution for existing shareholders, which is why investors reacted negatively to the news today.
But digging deeper should also raise concerns for investors. SoundHound AI isn't yet profitable. While sales have been growing as the use of voice technology and ChatGPT expands into many different industries, the company reported a loss of nearly $90 million in 2023.
As of Dec. 31, 2023, SoundHound AI only had $109 million in cash. That helps explain its need to raise capital. The good news is that management sees sales growing at an annual rate of over 40% for the next two years.
The market has been growing especially wary of companies that aren't generating profits. Inflation data that was released today resulted in a spike in interest rates. That would make borrowing costs move even higher.
As the company takes on more expensive debt or uses stock that dilutes existing shareholders, investors might see even lower share prices ahead for SoundHound AI.
