Could it be Indicating a Shift Towards SoundHound AI Being a More Secure Investment Opportunity?
Could it be Indicating a Shift Towards SoundHound AI Being a More Secure Investment Opportunity?
SoundHound AI (holding 20.3% of SOUN's shares) surfaced as a noteworthy artificial intelligence (AI) investment this year, following news of Nvidia's investment in their operations. This move served as a strong endorsement of the budding voice recognition AI sector. Excited retail investors saw this as a potential sign of SoundHound becoming the next major AI player.
However, when the company reported its financials, it didn't exactly live up to expectations. While growth was impressive, the business still wasn't turning a profit, and it relied heavily on the automotive sector for growth.
In its latest financial report, SoundHound's revenue showed improvement, and its customer base seemed more diverse. Could this mean less risk for investors, making now an opportune time to purchase shares of this AI stock?
Impressive revenue growth and a wider customer base
A risk investors typically face is when a company is overly reliant on a single client. This dependency on the other company's performance can undermine its success, and it may indicate that the product or service isn't versatile enough for other clientele or businesses. This could raise important concerns, especially for a company like SoundHound, which is in its growth phase.
In SoundHound's third-quarter results, spanning up to September, the company reported impressive revenue growth, with sales rising 89% year-over-year to $25.1 million. According to the company's report, this boost in revenue was largely due to SoundHound's acquisition of AI companies Amelia and SYNQ3.
SoundHound claims its largest client now contributes to 12% of revenue, compared to 72% in the previous year. A year ago, 90% of revenue came from the automotive sector, and now, the company boasts a more diverse clientele, with financial services, restaurants, healthcare, and insurance sectors each accounting for 5% to 25% of revenue. Investors should remain cautious, though, considering the significant impact from acquisitions.
Upon acquiring Amelia, a key advantage was the diversified customer base that included "numerous large enterprise brands." By incorporating this business into its operations, SoundHound has, in theory, expanded its customer base. However, it's hard to pinpoint exactly how much of that expansion came from organic growth.
Continuing losses remain a concern
One issue that remains a problem for SoundHound is its financial health. The company's operating loss for the quarter soared to $33.8 million. While revenue has risen at a substantial rate, this appears to be driven by higher operating expenses, which more than doubled from the same period the previous year.
SoundHound may be diversifying and expanding at a rapid pace, but it fails to demonstrate sustainable growth or a clear path to profitability. The company reported a cash reserve of $136.4 million at the end of the period, which doesn't seem substantial considering it burned through $75.8 million during the past nine months.
Has SoundHound improved as an investment opportunity?
SoundHound's latest financials show positives, but investing in this company remains risky. The business is growing, but it's doing so by incurring significant expenses. Until SoundHound can demonstrate a more sustainable growth path, I'd advise against purchasing the stock.
The risk for investors is that with SoundHound's continuous cash burn and lack of profitability, frequent share offerings may remain a necessity for the business in the near future. This would result in not only dilution, but also negative pressure on the stock, limiting its potential for gains and potentially leading to losses for investors who buy today.
Despite the impressive revenue growth and diversification of SoundHound's customer base, continuing losses and high operating expenses remain a significant concern for investors. The company's reliance on acquisitions for growth and its substantial cash burn could potentially lead to dilution and negative pressure on the stock, making it a risky investment opportunity. In light of these factors, it may be prudent for investors to exercise caution before considering purchasing shares of this AI stock.
Given the company's current financial status, it might be essential for SoundHound to focus on strategies to boost profitability and minimize expenses, thereby reducing the risk associated with its stock. Investors should closely monitor the company's financial reports and financial management moves to assess whether SoundHound can demonstrate sustainable growth and a clear path towards profitability in the future.