Shares of artificial intelligence (AI) company SoundHound AI (NASDAQ: SOUN) are down 8% in the past six months as excitement has cooled around the stock. Although the voice AI company is growing at a fairly quick rate, its losses are also rising.
The stock has more than doubled in value this year. However, with a market cap of just $1.7 billion, there could still be a lot of upside for investors if its business continues to grow and profitability improves.
But with this potential comes commensurate risk, so before you consider investing in SoundHound AI, there are three charts you should see.
SoundHound's profit margin isn't getting much better
Profitability is a big concern for SoundHound AI. While the business is getting bigger, so too are its losses. In the second quarter, revenue grew 54% year over year to $13.5 million, but its net loss climbed 60% to $37.3 million. Look at its profit margin trend below, and it's not clear when the company will eventually break even (if ever).
Data by YCharts.
While a negative profit margin isn't uncommon for a company in its early growth stages, it's a risk investors need to be aware of. Continued losses will not only weigh on the business but also increase the chances of future dilution.
The company has significantly increased its share count
Dilution is another risk for investors who buy shares of a company that's unprofitable. The business needs money to fund its day-to-day operations and growth objectives, but that's not coming from its core business. Instead, management must turn to debt or issue more equity to raise capital.
As a result, SoundHound's share count has increased significantly in recent years.
Data by YCharts.
The company is already burning through cash with operating cash outflows of $74.5 million over the past 12 months. If its cash flows don't significantly improve, investors should brace for the prospects of additional dilution, which could put downward pressure on the stock price.
High short interest means there's likely to be a lot of volatility
SoundHound faces a lot of competitors in AI voice services. It may be generating strong growth today, but that doesn't mean it has established a sustainable and defensible competitive advantage in the market. And many investors are betting against the company, expecting it to fail. That's evident through the stock's high short interest.
Data by YCharts.
As more short-sellers bet against SoundHound, that can put even more downward pressure on the stock. If the company doesn't show improvements to its cash flow or profitability, there could be more investors shorting the stock.
High short interest suggests investors should expect to see a lot of volatility, which adds to a stock's overall risk.
Is SoundHound AI stock a buy today?
Complicating matters further is the stake in SoundHound that Nvidia disclosed earlier this year. If not for the news Nvidia had invested in the business, odds are the stock wouldn't be doing as well as it is now, and it wouldn't be nearly as popular.
Accounting for that hype is no easy task, and I'm not too optimistic SoundHound can shore up its financials at the same time large tech companies with massive balance sheets are churning out competing voice AI platforms of their own. The AI stock may be worth keeping on a watch list, but it's hard to make the case it's a good buy right now.
Should you invest $1,000 in SoundHound AI right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
