SoundHound AI Prospects Challenges And Investor Outlook

Time moves quickly in the tech sector. Just three years ago, OpenAI's ChatGPT hit the scene, transforming the way people interact with information and spawning a brand new sector called generative artificial intelligence (AI).

Over the next three years, investors should expect consumer-facing software companies like SoundHound AI (SOUN -3.47%) to play an increasingly important role in this opportunity -- potentially minting plenty of fortunes as they bring this technology into people's daily lives. Let's dig deeper to see how this story could play out for the company.

A Potentially Massive Opportunity

There is no shortage of grandiose projections about generative AI, with analysts at Bloomberg expecting the industry to expand at a compound annual growth rate (CAGR) of 42% over the next decade. However, right now, most of the early winners are concentrated on the hardware side of the opportunity, providing the computer chips, servers, and cloud infrastructure that other businesses need to create consumer-facing software.

SoundHound could help change this dynamic by unlocking the synergies between speech recognition and the large language models (LLMs) that power platforms like ChatGPT. This could be the low-hanging fruit of AI technology because it could drive cost savings by replacing human labor in applications like restaurant drive-throughs where the stakes are low enough that an occasional mistake won't lead to catastrophic outcomes.

That said, while AI technology is promising, it remains hugely unreliable. Users often face 'hallucinations,' which is when the models generate incorrect responses. It is unclear how well customers will tolerate these challenges as LLMs become a bigger part of their daily lives. SoundHound has secured partnerships with mainstream restaurant brands like White Castle and Krispy Kreme, but so far, these deals look experimental.

Focus on the Numbers

It can be tempting to focus on exciting headlines and deals between SoundHound and other companies. However, investors should pay more attention to SoundHound's financial results because this will give the clearest picture of how well its voice AI solutions are actually being adopted into the market. So far, the situation is complicated.

First-quarter revenue soared by 151% year over year to $29.1 million. But while this top-line growth looks fantastic on the surface, it isn't necessarily organic or sustainable over the long term. SoundHound completed a slew of acquisitions in 2023 and 2024, which muddy the numbers.

These deals include enterprise AI software company Amelia, which is expected to add $45 million in annual revenue. Other recent purchases include the online ordering platform Allset and restaurant AI software company SYNQ3. These new businesses are overshadowing the performance of SoundHound's prior core business. And the company's growth rate will likely slow considerably in the future.

Image source: Getty Images.

Furthermore, an acquisition-led strategy relies on using up valuable capital and could add more unprofitable businesses to SoundHound's already cash-burning operations, making the company more risky. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell from a loss of $15.4 million to a loss of $22.2 million.

However, the good news is that SoundHound reports an impressive $246 million in cash on its balance sheet, which means it can sustain its losses for the foreseeable future without turning to outside sources of capital.

What Will The Next Three Years Bring for SoundHound

SoundHound is shaping up to be an early mover in the race to bring AI technology into the consumer-facing mainstream. As LLM technology improves over the coming years, SoundHound's software solutions will become more viable and attractive to enterprise clients. That said, there is no need for investors to rush into the stock right now.

As it stands, SoundHound is a small cash-burning business with no clear pathway to profitability. While the stock has a track record of occasionally booming based on exciting news events, it lacks the fundamental value to sustain these gains. Investors should wait until the numbers make more sense before considering a position in this speculative stock.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy..