The rising popularity of artificial intelligence (AI) has attracted increased investor interest in SoundHound AI (NASDAQ: SOUN). As the name implies, it applies AI technology to voice-recognition applications, and numerous industries have taken an interest in its offerings.
Additionally, SoundHound trades at a market cap of less than $500 million. That situation may have investors sensing the potential for outsized gains, as stocks like Amazon and Netflix once traded at similar market caps. But could SoundHound grow to such levels and make investors that buy now millionaires? Let's take a closer look.
The state of SoundHound AI
To understand the company's potential, one must understand the value it brings. Unlocking the value of voice recognition technology was probably on the mind of computer scientist Keyvan Mohajer when he founded SoundHound in 2005. The company launched the Midomi app the following year, which could identify music or songs from human voice, and so turning seemingly random tunes meaningful.
Mohajer continues to guide SoundHound, and under his leadership, the company steadily improved the ability for users to interact with technology products using their voices. In time, companies such as Hyundai, Motorola, Snap, and numerous others partnered with the company. By 2021, it was available in 25 languages.
Despite that growth, it did not make its public debut until a special-purpose acquisition company (SPAC) acquired the company in April 2022. So far, shareholders who bought on the day of the SPAC takeover and held are underwater. After an initial spike above $18 per share, it fell below $5 per share within a month. By the end of the year, it would drop below $1 per share, and it has spent most of the time since as a penny stock.
SoundHound AI's financials
One likely reason the stock is so low is that SoundHound AI continues to struggle financially. Its $15 million in revenue in the first half of 2023 increased 49% compared with the same period in 2022.
Unfortunately, the company incurred $57 million in costs and expenses over the same time frame. That led to a net loss of $48 million in the first two quarters of 2023. While that is less than the $57 million in the same period last year, it likely means profitability is far out of reach.
The company believes it will earn between $43 million and $50 million in revenue for 2023, amounting to a 50% yearly increase at the midpoint. Still, that increase may offer little relief, considering that costs and expenses were nearly quadruple its revenue in the last two quarters.
For now, SoundHound holds about $116 million in liquidity. It raised $100 million in April with what it called "minimally dilutive" debt financing. But with outstanding shares rising from 198 million in January to 241 million today, its funding comes at a significant cost to its shareholders.
Moreover, SoundHound can only sustain the current rate of losses for approximately one year. Hence, it will probably have to issue more shares or turn to the debt markets to stay in business. But with a $2 stock price and $66 million in long-term debt, both options will likely lead to more pain for shareholders.
Additionally, despite the aforementioned price action in SoundHound, its price-to-sales (P/S) ratio stands at 11. That is not an unusual level in the stock's short history, but given the potential for more share dilution, that valuation is unlikely to attract more shareholder interest.
Should I consider SoundHound AI?
Considering the company's financial situation, SoundHound AI is unlikely to make any small investors millionaires. Indeed, SoundHound's technology continues to attract prominent clients and significant revenue growth.
Unfortunately, SoundHound's costs and expenses are nearly quadruple its revenue, which means a path to profitability could easily involve several more rounds of stock dilution. That will make it hard for the stock to escape penny stock status, let alone mint millionaires.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
