SoundHound AI (SOUN -1.17%) is a company that creates technology to understand and naturally respond to human speech. The company began trading on the Nasdaq Stock Market on April 28, 2022, after merging with special purpose acquisition company (SPAC) Archimedes Tech SPAC Partners. Right from the start, it faced several challenges, such as going public in a weakening economy, investor worries over its high customer concentration, and using a complex business model that resulted in a lukewarm reception. The company also received mixed reviews from analysts, who questioned its growth prospects and profitability. The stock started trading at $8.72 a share, and by Dec. 22, 2022, it was trading at an all-time low of 0.93, down 89%. However, despite the bad start, this company should be an excellent investment over the long term. Here's why.
SoundHound AI fulfills a significant need
According to SoundHound, the voice artificial intelligence (AI) transactions market, which uses voice recognition and natural language processing technologies to make voice-based transactions like payments, purchases, bookings, and reservations, is expected to grow to $160 billion by 2026. The company expects to grab a significant chunk of that market by fulfilling the increasing demand for an independent voice AI platform.
Big tech companies like Amazon, Alphabet, Apple, and Microsoft have their own voice AI offerings. Still, those offerings are mostly just additional features to their primary services. Instead of big tech companies enhancing their customers' products, their voice AI offerings can lead to their customers losing control over their branding, their users' experience, and data, making it feel like the big tech company is the one in charge. Consequently, brands that depend entirely on big tech lose the opportunity to innovate, distinguish themselves, and personalize their offerings. Sometimes, these big tech companies compete with the customers they are supposed to assist, making their voice interface offerings less attractive.
Regarding alternatives to big tech, many smaller legacy vendors rely on outdated technology and charge high prices. And these vendors' offerings often don't match the quality of SoundHound's voice AI service, which is highly advanced and complex for competitors to replicate.
SoundHound also protects itself from companies attempting to copy its solutions through heavy investment in intellectual property, boasting over 120 granted patents and 140 pending patents in various areas such as speech recognition, natural language comprehension, machine learning, monetization, etc. As a result of the massive investment required to compete, there are few voice-enabled AI independent players. SoundHound may be the only company today capable of filling this potentially lucrative niche, providing it with an excellent opportunity. Notably, the platform is already drawing in a significant clientele. Today, the platform powers the voice-enabled AI experience for companies like Mercedes-Benz, Hyundai, Pandora, and Snap.
It's a high-risk investment
SoundHound has only produced operating and net losses as a publicly traded company. Additionally, its free cash flow (FCF) is negative. Being unprofitable with a negative FCF is a risk for any company, as it indicates that the company is spending more money than it is generating and may face a cash shortage or require additional funding to sustain its operations -- a problematic or impossible feat to accomplish on favorable terms without significantly reducing the ownership percentage of existing shareholders, particularly if the economy remains uncertain for an extended period.
SoundHound's revenue is also reliant on a small number of large customers. These customers account for a significant portion of the company's revenue. If any of these customers were to cancel their subscriptions, it could put the company at risk of financial trouble, and it may be hard for the company to stay afloat. SoundHound is still an early-stage company. Until it broadens its revenue sources and becomes profitable, investors must be comfortable with the risk of its stock being vulnerable to unexpected severe declines.
Why you should consider buying it
SoundHound AI primarily makes money through product royalty revenue from Houndify, its voice AI platform that allows developers to build voice-activated applications. When a developer uses Houndify to create a product, SoundHound receives a royalty on each unit sold. For instance, the increasing demand for voice-activated car features led to increased auto units sold and a tiny increase in auto unit royalty prices in the second quarter of 2023, which drove most of the company's 42% revenue growth over the previous year's period. Voice-activated features are becoming increasingly popular in cars because they allow drivers to interact with their vehicles hands-free -- which is necessary for safety reasons, as it will help drivers keep their hands on the wheel and focus on the road. The company is well positioned to capitalize on this growing demand for voice-activated car features. If SoundHound can continue to execute its business plan, it could become a significant player in the automotive voice AI market.
The second way the Houndify platform generates revenue is from subscription fees for its hosted services, enabling customers to use the Houndify platform without owning the software. One of its more popular services is Smart Ordering, a voice assistant for restaurants that takes phone orders and automatically processes them by integrating with various third-party point-of-sale solutions. Management believes the company has a massive opportunity across at least 1 million food establishments in the U.S. alone. Additionally, it has built a new product called Smart Answering to build a customer base for voice products for other businesses besides restaurants.
SoundHound AI represents one of the most promising investment opportunities in the tech industry today. With the increasing recognition of the potential of voice AI-powered solutions, the company has the potential to emerge as a leader in this space. This stock is worth considering for investors seeking to invest in a game-changing technology at its early stages.
