Shares of SoundHound AI(NASDAQ: SOUN) soared on Friday morning, tickled by a Street-stumping earnings report.
Sales rose 73% year over year, and the bottom line inched a penny closer to breakeven. Management boosted the midpoint of its full-year revenue target from $70 million to $71 million. Both results left Wall Street's consensus estimates far behind, and SoundHound AI's stock surged as much as 25.7% higher on the news.
The provider of voice control and audio analysis tools based on advanced artificial intelligence (AI) has been on a roller coaster in recent months. After Friday's pop, the stock trades 250% above last fall's 52-week lows but still 50% below the highs of March.
The spike in March was inspired by a small but also rare and interesting SoundHound AI investment by Nvidia(NASDAQ: NVDA). The peak prices dropped back sharply over the last six weeks, but the first-quarter report might have turned the tide again.
Is SoundHound a strong investment idea or an overvalued market darling today? Let's take a look.
What's new in SoundHound AI's first quarter?
First and foremost, the company took advantage of the sudden increase in share prices with a beefy round of stock sales.
As a result, its cash balance more than doubled from $95 million at the end of 2023 to $212 million three months later. On the downside, the move diluted existing shareholders by 21%. On the upside, SoundHound AI now has enough cash reserves to keep the business running for more than two years at the current rate of cash consumption -- and management expects cash flow to turn positive in 2025.
In the first quarter, the company also started or expanded its business in voice-control systems with dining chains such as Church's Chicken and Dine Brands Global's Applebee's.
In the automotive sector, Stellantis now has wheels on the road in Japan where SoundHound AI's voice controls are paired with OpenAI's ChatGPT system. Stellantis will continue to ramp up this AI integration, and an unnamed American carmaker is rolling out a similar service across its model range "later this summer."
The backlog of long-term contracts that will convert into revenue over the next couple of years is growing, too. This harbinger of future sales nearly doubled year over year to $682 million.
So is SoundHound AI a buy?
Those are a lot of potential catalysts for sustainable business growth. The stock is expensive but for good reasons.
In my eyes, SoundHound AI is a solid investment as long as you can handle a couple of years with negative earnings but stellar revenue growth. Nvidia's vote of confidence has nothing to do with it -- this little audio expert can stand on its own.
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Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
