Growth Stocks: SoundHound.ai Inc.

SoundHound Inc. (SOUN.US) is another of the companies with potential in artificial intelligence (AI) developments. This in particular is a leading artificial intelligence company based in Santa Clara, California. Its main focus is the development of AI-based music and voice recognition technologies. The company is notable for its flagship product, the app of the same name SoundHound, which allows users to identify songs simply by humming or singing a part of the lyrics. Unlike other apps like Shazam, which needs to recognize the exact song in order to give a positive response, with SoundHound it won't be necessary.

SoundHound AI is dedicated to the research and development of advanced audio signal processing and speech recognition algorithms. Its proprietary technology uses deep neural networks and machine learning techniques to break down and analyze the unique characteristics of a song or voice signal. This allows the SoundHound app to recognize songs and provide detailed information such as song title, artist, and lyrics.

In addition to the song identification feature, SoundHound AI has expanded its services to include a wide range of AI-based applications and solutions. The company has developed speech recognition technologies that allow users to interact with devices and applications through natural voice commands. Its natural language processing technology allows for the understanding of complex questions and answers, and its machine learning capabilities allow for continuous adaptation and improvement of the accuracy of its algorithms.

SoundHound AI has also entered the realm of virtual assistants, competing with tech giants like Google and Amazon. Its voice assistant, called Houndify, offers an open and customizable platform that allows companies to integrate AI technologies into their own apps and devices. Houndify has been used in a wide range of industries, including automotive, smart home, robotics, and more.

In short, SoundHound AI is dedicated to developing AI-based music and voice recognition technologies, with its SoundHound app and Houndify voice assistant as its flagship products. Its focus on continuous research and development has led the company to be a leading figure in the field of artificial intelligence applied to audio signal processing and voice interaction.

Why SoundHound AI? It is the time?

SoundHound is a voice AI platform. The voice-enabled AI company has the right narrative to expand at the present time, which is why investors are interested in the company. The idea here is that users of conversational AI can deliver better results.

source: SoundHound IR.

SoundHound estimates that its total potential market could reach $160 billion in the next 3 years (2026). For a company with a market capitalization of less than $1 billion (so not a unicorn), this clearly highlights the scope of potential.

Also, one major use case for SoundHound that seems compelling is for EV manufacturers. This led SoundHound to state in its latest earnings report:

“We are able to scale with existing customers and are constantly adding new ones. In automotive, for example, we saw unit growth more than double and we also achieved unit price expansion in the first quarter.”

The key to SoundHound's business, it seems, is that quick and easy implementation are key, with a large increase in customers, although the price is still relatively stable. Something common in the growth stage of any business and, ultimately, it is key that they maintain a convincing narrative that translates into revenue and attracting new customers quickly.

Revenue growth rates remain strong

Source: SoundHound IR

SoundHound's bullish case is that its growth rates are very strong. For example, in 2023 it is expected to see growth rates of around 44% year-on-year.

That being said, a certain pattern can be identified in their booking profile: Q1 2022: +134%, Q4 2022: 59%, Q1 2023: 46%. Bookings are a key indicator for estimating revenue growth rates.

In the ideal circumstance, it is desirable for reserves to remain stable. Or perhaps, if the company is growing rapidly, these are expected to increase. And yet, as we saw above, none of those aspects are taking place.

You might take a step back and see the whole picture, because you're wondering if it's still early days for SoundHound. And I would say that investing in a high growth company is always a challenge.

Particularly if investor expectations are already extremely high. Because when investor expectations are very high, you really need the company to continually positively surprise investors. And that is not the case here.

In fact, as seen in its first quarter 2023 results, SoundHound failed to meet its consensus revenue expectations.

The profitability profile is a problem

We are going to focus on the problems that SoundHound has and that are common to other AI companies that we have already discussed before.

source: SoundHound IR

Above, we see that despite SoundHound's revenue growing ($6.7 million vs. $4.29 million: +56.34%) also it's losses are increasing. Even if we consider your restructuring expenses as a one-off, non-recurring item, the fact remains that there is immaterial costs increase that is diluting the positive margin.

Next, note that SoundHound ended the fourth quarter of 2022 with 157 million shares outstanding. For the following quarter, the first quarter of 2023, the total number of shares outstanding increased by 31%.

source: SoundHound IR

This consideration alone, perhaps more than any other aspect, should make investors extremely cautious when putting their capital into this business. SoundHound AI, Inc. as it is raising capital to pay off debt. This doesn't make any financial sense. And the company would not engage in this type of financial engineering if the underlying business was more stable.

And the cash flow account clearly shows the liquidity oasis for fundraising, which has multiplied x5:

source: SoundHound IR

Conclusions

While the speech recognition product will greatly change our habits. Since it will make us more productive and will continue to provide unthinkable advantages for both consumers and companies. We can only identify this reason for buying SoundHound AI, Inc. Beyond this, it's hard to make a fundamental case that the company is a good business.

In fact, we wouldn't blame SOUN shareholders if they were a bit worried about the fact that Lawrence Marcus, a company insider, recently raised about 505.000$ by selling shares at an average price of $2.52. That sale cut its total stake by 26%, which isn't insignificant, but it's far from the worst we've seen.

In particular, that recent sale of Lawrence Marcus (Co-Founder of SoundHound) is the largest internal sale of SOUN shares that we have seen in the last year. That means an insider was selling shares at a price slightly lower than the current price ($3.13). As a general rule, it is concerning when experts sell below the current price, because it suggests that they were happy with a lower valuation. However, keeping in mind that sellers may have a variety of reasons to sell, so we don't know for sure what they think about the stock price. This one-time sale was “only” 26% of Lawrence Marcus's share.

SoundHound AI insiders did not buy any shares for the past year. We can see that the internal transactions (both companies and individuals) during the last year are shown in the graph below.

source: Insider Ownership

Another way to test the alignment between a company's leaders and managers and shareholders is to look at how many shares they own. Typically, the greater the insider ownership, the more likely it is that insiders will be incentivized to build the company for the long term. It's great to see SoundHound AI experts own 20% of the company, worth about $119 million. Most shareholders would be happy to see this type of inside position, as it suggests that management incentives are well aligned with other shareholders.

So what do internal SoundHound AI transactions indicate?

The recent internal sales of SOUN shares are also evidence that the opposite is also worrying. If we look at the last twelve months, they do not show any internal purchases. The company has a lot of inside ownership, but this can be questioned given the history of stock sales. So while it's helpful to know what the experts are doing in terms of buying or selling, it's also helpful to know the risks facing a particular company. And that SOUN managers themselves are not buying is a pretty clear indicator.

The chart shows price recovery

SOUN.US, D1. Source: xStation

From a technical perspective, SOUN's stock price behavior reflects a barrier in the area of $3.37 per share. That if it manages to overcome, it could go to the next reference level near $5 per share. However, the sharp falls since its launch on the stock market, which are more typical of "pump&dump" companies, do not give confidence.

Although the most risky investors may think that there is more to gain than to lose and perhaps a marginal position on the total of a portfolio could be interesting. Especially since if we compare this business with that of another AI listed company previously analyzed (BigBear.ai), SoundHound has private contracts and a growing number of clients, while the other one predominates with public contracts that greatly limit its ability to growth.

Dario Garcia, EFA
XTB Spain