SoundHound AI (SOUN) was a market darling in 2024 with shares soaring 835%. The original push higher was the revelation that AI chipmaker Nvidia (NVDA) owned a stake in the company, indicating SoundHound’s voice recognition technology could rocket the company to the forefront of the industry.
Yet after Nvidia’s updated investment list showed it sold all of its SoundHound shares, SOUN stock plunged 28%. If the biggest name in AI was no longer backing the business, investors wondered whether they should stay in.
SoundHound AI is best known for its SoundHound music identification app that can identify a song’s title and artist for a listener just by hearing the tune. However, that had become a commoditized market and there was more opportunity for Houndify, its “voice-enabled conversational interface.”
Houndify allows users to hold natural language conversations with devices and apps and answer complex questions. While it has been featured in vehicles from automakers such Honda (HMC) and Stellantis (STLA), the voice-activated AI assistant market must contend with Siri from Apple (AAPL) and Alexa from Amazon (AMZN), among others.
The AI world is rapidly advancing so that voice assistants are almost commonplace, making SoundHound’s ability to keep up with bigger and significantly better-financed rivals difficult.
That’s not to say SoundHound isn’t competitive. For example, its AI voice technology platform will be included in a next-generation Honda-Sony (SONY) electric vehicle called AFEELA. In fact, SoundHound’s biggest customers are Tier 1 automakers.
The technology is also used in a host of other industries, including telecom, hospitality, restaurants, financial services and voice-enabled mobile apps and is available in dozens of languages.
SoundHound revenue is up 76% over the last 12 months, hitting $67.3 million. Gross profits are expanding 18%. Yet the AI stock’s biggest problem is it can’t translate that into operating profit. Losses before interest and taxes widened to $93.3 million from $64 million from the year-ago period. Net losses worsened to $111 million.
Essentially, the more SoundHound AI sells, the more it loses. In operation for some 15 years, it has never made a profit and hasn’t shown any ability to get close to doing so.
Yet that hasn’t deterred Wall Street from being upbeat about its potential. Of the seven analysts covering SOUN stock, it has a consensus buy rating from them and a $12.36 per share one-year price target. That implies 12% upside from where it currently trades, though admittedly it was well below where SoundHound was before the Nvidia bombshell hit.
Still, the high end of SOUN’s price target of $26 a share implies a double or more in the stock, offset by a low one-year target of $7, suggesting 43% downside risk.
Nvidia’s decision to dump its SOUN stake suggests its priorities are changing. It had owned 1.7 million shares of the voice recognition stock worth some $8 million. Despite SoundHound maintaining its “alliance with Nvidia continues to be strong as we push the boundaries of AI innovation together,” the chipmaker is looking elsewhere for opportunity.
The automotive market is an area ripe for opportunity, though autonomous vehicles (AV), rather than audibly ordering food from your car’s infotainment system, have the longer runway for growth.
Nvidia has said the auto market where it sees the next phase of expansion developing, which explains why it invested $2.4 million in China’s leading AV company, WeRide (WRD). Once again, SoundHound finds itself advancing in a commoditized market where any number of AI voice assistants can work rather than in truly innovative niches.
Its appearance at the Consumer Electronics Show earlier this year was also underwhelming. Its in-car food ordering capabilities was more an incremental improvement instead of revolutionary.
The global market for voice and speech recognition technology is expected to expand at a 14.6% compound annual growth rate between now and 2030. Specifically, speech recognition will account for two-thirds of the increase. SoundHound looks like it can carve out a sizable stake in the market.
Notably, Wedbush analyst Daniel Ives called SoundHound “a long-term winner in the AI revolution” in an investor note in December.
But SOUN stock is pricey even after its haircut. With a $4.3 billion market capitalization, shares go for 63 times sales, meaning investors are paying $63 for every $1 of sales. That might be fine for a high-growth stock with the potential for profitability, but SoundHound hasn’t demonstrated that propensity.
SoundHound otherwise seems fine financially, with $135.6 million in cash and equivalents and just $39.7 million in debt, suggesting it’s not going to go out of business anytime soon.
I maintain SOUN stock is better as a takeover target by a larger rival wanting to incorporate its technology into its own platform than as a standalone investment to buy today.
