Artificial intelligence (AI) stocks are attracting significant attention, as technology companies compete to offer the best AI services. There have already been some big winners, like semiconductor company Nvidia, but there are plenty of AI stocks that once looked like a sure bet and seem less so now.
SoundHound AI (SOUN -1.42%) is one such company. The company's stock soared 300% over the past three years, but is down 45% since the beginning of this year. Lots of small start-ups have volatile share prices, so it's worth taking a closer look at SoundHound AI to see what's happening with the company.
While its tech is promising, I think it's best not to buy SoundHound AI stock right now. Here's why.
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What's going well for SoundHound
There are a few good reasons why investors have been interested in SoundHound, including the company's impressive revenue growth. SoundHound's sales increased 151% in the first quarter (which ended March 31) to $29 million. That kind of revenue jump is exactly what you want to see from a young company that's carving out a niche in a new market.
What's more, SoundHound appears to be successfully attracting large customers to its conversational AI platform. This includes working with Chinese tech company Tencent to bring SoundHound's voice-activated services into more automotive brands, and expanding the locations that use its tech to include Firehouse Subs restaurants, Five Guys, and others.
SoundHound also doesn't have any debt, and the company finished Q1 with $246 million in cash and cash equivalents. The lack of debt is impressive for a start-up that's already expanded its AI business and attracted significant customers.
Finally, as tech companies race to implement better AI into their products and services, many will need conversational AI solutions that allow their customers to interact easily with their artificial intelligence programs. That's causing a rapid expansion of the conversational AI market, which will be worth an estimated $152 billion by 2033.
Despite its potential, SoundHound AI still isn't a buy
One concern for potential SoundHound investors is that the company isn't profitable and could take a while to get there. SoundHound reported a non-GAAP loss of $0.06 in Q1, up from a loss of $0.07 in the year-ago quarter. Its gross margins also fell to 51% in the quarter, down from their previous 66%.
Second, and perhaps most important, is that SoundHound's rapid share price gains over the past several years have made its stock very expensive. The company's shares currently have a price-to-sales of 35, far above the average of about 7 for internet software companies. SoundHound's sales would have to continue growing at a breakneck speed to justify its stock's current valuation.
With the company's substantial losses and high valuation, I think it's best not to buy SoundHound AI's stock right now. There are plenty of other profitable AI stocks that are far less risky and have lower valuations, which makes SoundHound's shares not seem worth the risk.
