Artificial Intelligence (AI) is being introduced into more and more services every day, and one area that is currently gaining attention is the combination of voice and AI.
But smart assistants are nothing new. apple We integrated Siri into our hardware devices over a decade ago. Amazon and alphabetGoogle's products have been popular among consumer electronics enthusiasts for years.
Still, perhaps the company that's garnering the most attention with its AI voice applications is SoundHound AI(Nasdaq: SOUN).
Shares of the emerging software development company have risen 138% so far this year, and the company just reported strong financial results for the first quarter of 2024, which ended March 31.
Let's take a closer look at the financial results to assess whether SoundHound is a lucrative investment opportunity.
The new frontier of voice and AI
AI-powered voice products are more prevalent than you might think. In addition to Internet of Things (IoT) devices, voice recognition can play a key role in vehicles, restaurant order processing, customer service applications, games, and more.
According to research compiled by Fortune Business Insight, the market for voice recognition AI tools is expected to reach $50 billion by 2029, four times the estimated size just two years ago.
Image source: Getty Images.
SoundHound AI's revenues are soaring…
In the first quarter of 2024, SoundHound AI's revenue grew 73% year over year, which is impressive on the surface, but keep in mind that sales were just $11.6 million.
Given that management expects full-year 2024 revenue to be in the range of $65 million to $77 million, it's clear the company is still fairly small.
Additionally, the company is burning through a higher percentage of cash despite accelerating revenue. In the first quarter, the company reported an operating loss of $28.5 million. By comparison, SoundHound AI's operating loss in the first quarter of 2023 was $25.2 million.
These losses spilled over to the bottom line, with SoundHound AI's net profit and earnings before interest, taxes, depreciation and amortization (EBITDA) both declining in the most recent quarter compared to the same period last year.
But stocks remain expensive and questions remain
There were parts of the earnings report that made me wonder whether to buy SoundHound stock.
The company ended the quarter with $226 million in cash and cash equivalents on its balance sheet, the largest cash balance SoundHound has ever had as a public company, suggesting strong liquidity, but there's more to it than meets the eye.
SOUN Cash and Equivalents (Quarterly); Data from YCharts.
The company sold $137 million worth of stock in the first quarter, according to filings. In other words, the stock price had risen sharply in a relatively short period of time, and management decided to sell shares to raise capital.
There's nothing wrong with this approach, but it's important to remember that when management decided to sell shares, it was investors who jumped on the bandwagon. So, anyone who bought shares in the first quarter likely did so at a high price.
Plus, the company can't rely on selling stock forever — it eventually needs to prove it can turn a profit and generate steady cash flow, or investors will eventually sell off their shares and the stock price will plummet.
As of this writing, SoundHound AI has a market cap of $1.7 billion and a price-to-sales multiple of 24.8x. S&P 500 It's 2.5.
Given that SoundHound is nowhere near the size of an S&P 500 company, I think the valuation is a bit too high, and I'm skeptical of the company's long-term prospects given the growing number of competitors in the voice recognition AI space.
I think the company is developing an interesting technology, but in terms of investment prospects, I think there are too many risks in this business.
The stock is overvalued and buying shares at these levels carries a huge amount of risk. We believe investing in SoundHound AI is speculative and that there are much better opportunities in the AI space with larger, more established companies.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool's board of directors. Adam Spatacco has invested in Alphabet, Amazon and Apple. The Motley Fool has invested in and recommends Alphabet, Amazon and Apple. The Motley Fool has a disclosure policy.
