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Soundhound AI Co., Ltd. (NASDAQ: SOUN) has some compelling opportunities for voice AI in the automotive and restaurant industries. However, current growth does not justify current ratings. Expect stocks to trade more on AI hype. fundamentals of the near future.
Company Profile
SoundHound AI, Inc. offers a speech AI platform called Houndify, which aids human-computer interaction. Its platform enables more conversational and natural interactions when dealing with voice-enabled third-party his assistants, etc. that allow people to speak in a more natural way and ask more complex questions.
The company says its speech recognition technology combines automatic speech recognition and natural language understanding to convert speech into meaning in real time. Moreover, its deep semantic understanding technology enables the voice AI platform to understand complex queries.
produced by the company We generate revenue in several ways, currently mostly through royalties. The company collects royalties when the Houndify platform is embedded in devices such as third-party assistants, cars, appliances and smart speakers. Royalty is based on volume, usage, or duration.
The company also generates subscription revenue from services that don’t involve physical products, such as ordering food at restaurants. The company also has a music recognition app and hopes to generate revenue through advertising and lead generation.
opportunities and risks
SoundHound AI, Inc. is in the very early stages of monetization and monetization. In 2022, he earned just $31.1 million, $28.4 million of which came from royalties. Being in such an early stage is a huge opportunity, but it also comes with a lot of risks.
One of the first big markets SOUN is targeting is automobiles. The company now has 20 automotive partners and has signed a multi-year deal with Hyundai for 2022. It also expanded its relationship with Stellantis NV (STLA) in Europe. In addition, we have established partnerships with LG, Harman, DMI, DPCA, etc.
According to Navigant Research, by 2028, 90% of new cars are expected to have voice assistants. This has been an area of focus for the carmaker over the last few years and represents a huge opportunity for his SOUN going forward. The company has so far established good relationships with automakers in South Korea, France and Germany. We have also established relationships with Chinese automakers.
However, even among current automotive customers, SOUN has a very low penetration rate of around 1-2%. The company sees an opportunity to raise that level to 30-35%, while also gaining new customers and increasing the overall number of voice AI-enabled vehicles.
company presentation
Outside the automotive industry, another big industry SOUN is targeting is restaurants. On this front, the company is looking to help restaurants automate ordering through drive-thru, ordering kiosks, in-apps and over the phone. Quick service restaurants have dealt with labor inflation issues for years, and more recently with labor shortages, so this seems like a good market to pursue in my view. Being able to reduce the effort required to operate has become an industry priority.
SOUN has an agreement with White Castle, but more recently has partnered with restaurant POS operators such as Micros, which is owned by Oracle Corporation (ORCL), Toast, Inc. (TOST), and Block, Inc. (SQ). increase. It’s also a smart move because these businesses have easy access to restaurants through their sales representatives.
Discussing restaurants on the Q4 conference call, SOUN CFO Nitesh Sharan said:
“Hundreds of restaurants have already signed up. The time to flow or monthly recurring revenue can be very quick, especially when you go into a multi-store restaurant that has their menu pre-loaded and features and voices custom developed. Then it’s very fast to get to restaurant 2 or 3. Sometimes with the drive thru feature there might be some acoustic issues you have to figure out, but in general , especially in cornering, there are no complications of traffic or outside noise, so it can be faster.”
Looking at the risks, the biggest risk is where the company is in its lifecycle. Like many stocks that went public through SPAC during the SPAC boom, SOUN arguably went public too early in its lifecycle. The company has a cumulative backlog of his $332 million, but last year he made just over $31 million in revenue. And with an average contract length of his 6.5 years, future earnings will average about $51 million a year.
SoundHound AI, Inc.’s backlog grew 59% year over year. While this is good, it also does not indicate that the company is growing rapidly. This is what you would expect from a company that is still in its early stages. Like SOUN. After that, his backlog only increased by 10%. We also saw revenue declines in both Germany and the US in 2023, which is a bit worrying. The significant decline in Germany was due to customers prematurely terminating their professional services contracts.
10-K
Meanwhile, SOUN’s three largest customers account for 67% of 2022 revenue. This represents a lot of customer concentration risk. I hope this spreads further as we have so many automotive partners.
And finally, the company announced a restructuring plan last year to cut costs. We plan to save $60 million in costs by 2023. Cost-cutting plans are generally a good thing, but for a company like SoundHound AI, Inc., which is in the early stages of its monetization efforts, I don’t think this is a good thing.
evaluation
SoundHound AI, Inc. is forecast to grow revenue 48% to $45.9 million. On that basis, SOUN stock trades at 14.7 times his price to sales.
But analysts expect big growth from SOUN. The consensus for earnings in 2024 is that sales will rise 107% to his $95.2 million. And in 2025, one analyst predicts revenue will soar to $635.4 million. That seems to be a single analyst consensus, and off in my view.
SOUN is trading at one of the highest valuations among early-stage AI companies. I don’t think there’s much justification for the premium other than what the oversized growth analysts of the later years are predicting.
SOUN valuation and peers (fin box)
Conclusion
SoundHound AI, Inc.’s technology and partnerships are interesting, but at this point I don’t see anything that justifies their current rating. In my view, companies at this stage of their lifecycle are riding some great trends to grow faster and not have to restructure their operations to cut costs. When the opportunity is so great, its top priority is to get share.
At this point, it is very real that SoundHound AI, Inc. will trade based on AI hype rather than actual fundamentals. That’s why I just stayed away. The two major verticals that SoundHound AI, Inc. pursues (automotive and restaurants) should see accelerated growth and signs of further progress.
