At first glance, investors might wonder whether SoundHound AI (SOUN +12.55%) stock could set them up for life. Its recent $5.1 billion market cap is close enough to the ground floor that the company might have a tremendous runway for expansion. Moreover, its high-profile client base could reinforce the company's stability and growth.
Still, such advantages may not be sufficient to make SoundHound stock one of the great growth stories of the next decade. Investors need to take a closer look at the business and financials before drawing such a conclusion.
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Making sense of SoundHound AI
Founded in 2005, SoundHound initially attracted attention with a music recognition app that gained popularity early in the last decade. Soon after, it began building relationships with automobile manufacturers, including Hyundai Motor and Mercedes-Benz, that had taken an interest in its voice AI platform.
However, much of its more recent success comes from its SoundHound Chat AI product, which utilizes generative AI to provide a more conversational experience for users interacting with chatbots.
It is easy to understand why SoundHound wants to capitalize. Grand View Research forecasts a compound annual growth rate of 30% between 2024 and 2030, taking the industry size from $3.5 billion in 2024 to an estimated $21.8 billion by 2030.
Amid its success, SoundHound AI went public in April 2022. Indeed, its stock price initially dropped following the 2022 bear market but has been on an upward trajectory since early 2024. If you had bought shares on its first day after a special purpose acquisition company (SPAC) bought it, you would have earned returns of just over 70% during the stock's history.
NASDAQ: SOUN
Key Data Points
What the financials say about SoundHound's potential
At first glance, the financials point to potential. In the first quarter of 2025, revenue of $29 million increased by 151% from year-ago levels. This was an improvement over the 84% increase in 2024.
Still, the rest of the income statement might foster doubts about the company. In Q1, total operating expenses were a negative $99 million, though a $176 million change in fair value of contingent acquisition liabilities temporarily boosted its financials.
If not for that one-time benefit, operating expenses would have been $77 million, far above its revenue. That would have also translated into a substantial increase over its operating loss in Q1.
In Q1, SoundHound reaffirmed its 2025 revenue estimate of between $157 million and $177 million. Still, even though that would amount to a 97% revenue increase at the midpoint, operating expenses were $203 million, not including a $223 million change in fair value of contingent acquisition liabilities in 2024. If operating expenses also rise 97%, SoundHound is looking at another year of massive losses.
As of Q1, SoundHound had about $245 million in liquidity. However, continuing losses may force it to either take on debt or issue more shares, likely affecting shareholders negatively.
The aforementioned one-time benefit presumably gives SoundHound a P/E ratio, but that same benefit makes it a misleading valuation indicator. Although you can turn to the price-to-sales (P/S) ratio, the 46 sales multiple is much higher than the S&P 500 average of 3.2, indicating the stock price is far ahead of the company's revenue levels.
Can buying SoundHound AI stock today set you up for life?
Considering the state of SoundHound stock, it has more to prove before investors can feel confident it will set them up for life.
Admittedly, SoundHound's technology and its popularity have shown enough promise to drive triple-digit revenue growth. Since the company has only captured a tiny portion of the industry's estimated growth, the rapid increases could continue for the foreseeable future.
Unfortunately, its operating expenses outpace revenue by a wide margin, indicating profitability will take years, if it reaches that point at all. Moreover, a 46 P/S ratio means that its valuation is significantly ahead of its growth, which could limit future stock price increases and raise the likelihood of a substantial pullback.
Ultimately, SoundHound has positioned its business for a bright future. Nonetheless, until the company can forge a path to profitability, investors are likely best served by staying on the sidelines.
