SoundHound AI (SOUN 1.16%) is an artificial intelligence (AI) company that specializes in a voice recognition platform. It has lots of potential, specifically with drive-thrus at restaurants, and its technology is helping to improve efficiency for many businesses.
Recently, it reported its latest earnings numbers. And while investors expected growth, they may not have been expecting a profit, which is what SoundHound reported. It was an unadjusted profit, too.
It happened as a result of a change in value, but the reason for that change is what might surprise you the most. In a bit of an ironic twist, the tech company's falling valuation actually helped its bottom line.
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An unexpected path to profitability
A big reason investors have been hesitant to buy shares of SoundHound AI is because of the company's poor bottom line. The business has been growing, but a lack of profitability has been a concern.
However, on its most recent earnings report, for the first quarter of 2025 (which ended on March 31), it posted a surprise profit of $129.9 million. That's a massive improvement from the $33 million loss incurred in the same period last year.
So what was behind the sharp turnaround? A change in the fair value of contingent acquisition liabilities resulted in $176.1 million getting added back to its expenses, which was more than all of its operating costs.
And what was surprising about that was the reason for the change in value. The adjustment was related to its acquisitions of AI companies SYNQ3 and Amelia, and how much SoundHound would still need to pay to the sellers, based on meeting certain targets.
The vast majority of those payments are in stock, and thus, since the company's share price has been crashing this year, that resulted in a decline in the fair value of its contingent liabilities. If the stock price rallies, it could hurt the company's earnings in the future.
Cash flow is what may be more important for SoundHound investors
Acquisitions have helped SoundHound grow its operations. But amid all that, there can be a lot of noise in the financials, as is evident with contingent liabilities. Not only did the company's revenue jump by 151% during the first three months of 2025, totaling $29.1 million, but there also were drastic changes on the bottom line as well, with the business suddenly swinging to a profit.
This, however, is what the accounting world refers to as "low-quality earnings," simply because they aren't likely to be repeatable. A one-off quarter where the company posts a profit is not necessarily a sign that it has turned a corner and become a safe buy.
For SoundHound, which is going through a lot of changes and is in its early growth stages, focusing on cash flow may be more helpful to investors. And on its statement of cash flow, it only showed modest progress. It used $19.2 million from its day-to-day operating activities, versus $21.9 million in the prior-year period. The company's rate of cash burn is slowing, but not significantly.
Its operations aren't sustainable yet, but the good news is that with cash and cash equivalents totaling $245.8 million, there's no danger of running low on money anytime soon.
Should you buy SoundHound AI stock?
SoundHound's stock is down close to 50% this year, and while it has been rallying in recent weeks, it's still a risky investment. With plenty of competition in AI and with many questions remaining about its business and just how well it will be able to grow in the long run, I would take a wait-and-see approach with the AI stock for the time being.
