SoundHound AI is an all-or-nothing style of investment.
Hitting a home run in investing can be very satisfying as the returns can be incredible. But alongside home runs come strikeouts, and when you’re an all-or-nothing style of investor, strikeouts happen a lot more than home runs. Still, if the overall returns make up for the massive losses, this can be a worthy investment strategy for those with the right stamina.
These days, some investors might be looking for artificial intelligence (AI) stocks with this home-run potential, and I think I’ve pinpointed one. SoundHound AI (SOUN -1.00%) has the makings for a potential home-run investment and is also backed by Nvidia (NASDAQ: NVDA). There’s no better partner in the AI space.
Let’s see what could make SoundHound a top choice for those swinging for the fences.
Its audio recognition technology is thriving in two fields
SoundHound AI integrates AI with audio recognition. While this has multiple applications, two fields where SoundHound has made the biggest impact are restaurants and automobiles. For restaurants, SoundHound has been automating drive-thru windows and taking orders by phone. Margins in the restaurant business are notoriously slim, so if a restaurant can reduce headcount by using AI at a cheaper cost, it will.
SoundHound’s audio recognition technology is being integrated into digital assistants in the automotive industry. Hands-free technology has been around for over a decade, but it’s clunky technology that doesn’t always work right. SoundHound fixes this problem and integrates generative AI technology with its product by utilizing ChatGPT.
However, this requires internet connectivity to function properly, so Nvidia and SoundHound teamed up to embed a large language model onto an onboard GPU that allows this model to function regardless of where the vehicle is located.
Overall, SoundHound offers a great value proposition for customers. However, there are some concerns about the company’s financials.
SoundHound is burning a lot of cash
In the first quarter, SoundHound’s revenue increased 73% year over year to $11.6 million. While that’s an impressive headline figure, $11.6 million isn’t a lot of revenue compared to most companies.
The issue with SoundHound’s financials is its burn rate, as the company is highly unprofitable. Even though it generated $11.6 million in revenue, it posted a $28.5 million operating loss, which means it’s spending about 4 times as much money as it’s bringing in. That’s an unsustainable model, but it should be expected for a company still in the early innings of deploying its products.
SoundHound’s saving grace is its massive backlog. This metric sums up all of the bookings it has in the future, which isn’t a guarantee of revenue. But it paints a picture of the potential demand. If SoundHound converts its $682 million backlog into true revenue, it will have achieved massive success.
With such a large backlog, SoundHound should have no issue raising additional funds by issuing shares on the public market, allowing it to sustain its unprofitable habits.
But does all of this add up to a stock worth taking a swing at? Although the stock used to trade for a much higher valuation during the initial AI hype cycle at the start of the year, 20 times sales is still expensive for the stock of a company that still has a lot of work to do before it’s viable.
SOUN PS Ratio data by YCharts
I still think there’s enough of an investment here to take a shot at SoundHound, but anyone who buys the stock must be prepared to watch their investment go to zero. If you have that ability, then it’s a stock worth considering, as it does have a lot of potential. But remember to keep position sizing very small, as a total loss is a possibility.
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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