The company's share price experienced massive swings this year, so an investment is not for the timid.
After artificial intelligence (AI) burst on to the scene in 2022, AI-based companies became a hot investment on Wall Street. This helps to explain why shares of tech company SoundHound AI (SOUN -1.86%) rocketed from a 52-week low of $1.49 last year to $10.25 on March 14.
But just days later, financial services firm Cantor Fitzgerald downgraded the stock because of SoundHound's lofty valuation at the time. Consequently, shares lost more than half their value, and hover around $4 at the time of this writing.
Does this signal a buy opportunity, or do reasons exist to avoid the stock? Let's dig into SoundHound to determine if it makes a good investment for the long haul.
SoundHound's technology success
SoundHound was established in 2005, but only went public in 2022 through a special purpose acquisition company (SPAC) merger. The company stated its goal is to "create a voice AI platform that exceeds human capabilities."
SoundHound's AI-powered voice technology allows its software platform to understand human speech in 25 languages. This tech is licensed to businesses for tasks such as answering customer service phone calls and taking orders at a drive-thru. Clients include TV manufacturer Vizio, automaker Hyundai, and hamburger chain White Castle.
SoundHound added to its in-house technology with the fourth-quarter acquisition of SYNQ3, which provides voice AI abilities to restaurants. This brings a portfolio of sizable customers, such as Chipotle Mexican Grill, to SoundHound.
Moreover, the company formed a partnership with AI chipmaker Nvidia. SoundHound will integrate its voice capabilities into Nvidia's AI-enabled driving assistance platform.
SoundHound's rapid revenue growth
SoundHound's compelling technology translated into record fourth-quarter revenue of $17.1 million, an 80% year-over-year increase. For the full year, the company experienced 47% revenue growth in 2023 versus the prior year, reaching $45.9 million in sales.
That kind of strong sales performance is what you want to see in a growth stock such as SoundHound. Moreover, SoundHound's gross margin increased from 69% in 2022 to 75% last year.
The company's trend of rapidly rising revenue is expected to continue. SoundHound forecasts sales of at least $63 million in 2024. This would be a 37% year-over-year increase from 2023.
And in a rare move by a public company, SoundHound also announced its revenue expectations for 2025. The company anticipates sales to accelerate that year, rising past $100 million in sales.
Despite the robust revenue growth, SoundHound is not profitable. It ended 2023 with a net loss of $88.9 million, although this was an improvement over 2022's $116.7 million loss.
The lack of profitability is not overly concerning at this stage in SoundHound's business. In fact, it's common for fast-growing tech companies to operate for years at a loss, sacrificing profits in favor of growing the business.
Evaluating an investment in SoundHound stock
While a lack of profitability alone is not necessarily a warning sign, SoundHound exited 2023 with $84.3 million in debt. The company is not cash-flow positive either.
Moreover, SoundHound's brief history as a public company makes it challenging to gauge if it can manage its financial health over the long run, such as chipping away at its debt, or turning the corner to become cash-flow positive.
Adding to this, the company disclosed on April 9 it's preparing to offer up to $150 million additional shares for sale. Not only does this dilute the value of an investment in the company, the need to raise money could indicate SoundHound is concerned about its finances.
Certainly, SoundHound's business possesses potential, having achieved a number of noteworthy successes. But its stock is only for investors with a high risk tolerance, considering the uncertainties over its financial health and the rollercoaster ride its shares have undergone.
On a personal note, I normally avoid stocks where the share price is just a few dollars. That's because a period of underwhelming financial performance could push down the price to the point where a reverse stock split can occur, or worse, the stock gets delisted.
If SoundHound remains of interest to you, a good approach is to put it on your watch list. See how it performs over the next few quarters, looking for it to maintain its high revenue growth rate, as well as whether the company is moving closer toward positive cash flow, and ideally, profitability.
If an encouraging trend surfaces, then SoundHound may emerge as a good investment over the long term. But for now, the stock is a risk that's not for the faint of heart.
Robert Izquierdo has positions in Nvidia. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool has a disclosure policy.
