Voice-focused artificial intelligence (AI) stock SoundHound AI (SOUN -1.11%) has crashed close to 46% this year. While it has still more than doubled in value from where it was a year ago, the excitement around this once-hot AI stock has cooled off significantly.
SoundHound AI is growing at a fast rate and it still has loads of potential in AI, especially as businesses look to add efficiency and automate their operations through its smart ordering and dynamic drive-thrus. With a market cap of around $4 billion, this could make for a compelling option for AI investors to consider for their portfolios.
What does SoundHound AI need to do for its stock to excite investors again, and is a rally likely to happen anytime soon?
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Investors want more than just AI potential
The biggest problem for SoundHound is that although it's growing its revenue, it may not necessarily have a path to profitability. The company did turn a profit in its most recent quarter (which ended on March 31), but it was due to an adjustment in its contingent liabilities. Without the favorable change in fair value, the company would have incurred an operating loss of $48 million -- an increase of 68% from the $28.5 million operating loss it incurred a year earlier.
The company's year-over-year revenue growth rate of 151% during the quarter looked impressive as sales topped $29 million, but it was largely due to acquisitions. And while that can be a way to quickly boost sales, investors know that can also add inefficiency along the way and not necessarily result in a more sustainable business model. It can take time to eliminate redundant costs and take advantage of any cost synergies.
For SoundHound to win over investors, it's likely going to need to show that it can scale its operations in a much more sustainable way; one-off profits that aren't going to be repeatable will do little to move the stock.
The big test will come later this year
In August of last year, SoundHound AI acquired Amelia, an AI software company that expanded its reach into more industries. Management said that combined, the businesses had "nearly 200 marquee customers." Prior to that, a big concern around SoundHound was its lack of diversification. In 2023, two customers accounted for 62% of its revenue. Meanwhile, in its most recent quarter, no customer accounted for more than 10% of its top line.
But having more customers doesn't mean that they're all big customers, or that they're placing big orders with SoundHound. This is why the company's upcoming results after August can be much more useful for investors in assessing just how well the business is growing. Right now, it's still getting a boost from its big acquisition of Amelia. Once that isn't the case, it'll be clearer how well SoundHound is really doing, both on its top and bottom lines.
Should you invest in SoundHound AI stock today?
SoundHound faces a lot of competition in AI as there are many other companies that offer comparable solutions. And that risk is reflected in the stock's falling valuation this year. If there's a slowdown in AI-related spending, possibly due to recession or other economic fears, that's only going to make it even more imperative for SoundHound to have strong financials to be able to calm the nerves of growth investors.
This is a highly speculative stock to own, and it's one that comes with significant risks. If SoundHound is able to grow and show that it has a path to profitability, there could be considerable upside for the stock. But if it's unable to do that, I wouldn't be surprised to see the stock continue to fall further in the weeks and months ahead.
A lot would have to go right for SoundHound to show that it's a good AI stock to invest in right now, which is why I'm not optimistic about a rally happening anytime soon. The safest option may be to take a wait-and-see approach with the stock for the time being.
