Artificial intelligence (AI) has the potential to change virtually every facet of a person's life, much like the internet has over the past few decades. As a result, the excitement and bullishness in AI has resulted in many stocks generating incredible returns. A prime example of that is SoundHound AI (SOUN 3.48%).
This year alone, shares of the AI stock are already up a staggering 156%, and at one point they were up as much as 320%. Chipmaker Nvidia has a stake in the business, which is a key reason many investors are also bullish on the voice AI company. But before you jump in and invest in this up-and-coming business, there are three important things you need to know.
1. The company is likely going to need to raise cash in the future
SoundHound is not a profitable business, nor is it generating positive cash flow. During the first three months of the year, the company used up $21.9 million simply to run its day-to-day operating activities. As the business tries to scale its operations, that cash burn may accelerate.
And that's a problem, given that as of March 31, the company's cash and cash equivalents balance was $211.7 million; SoundHound AI isn't sitting on billions in cash. In April, it announced plans to sell up to $150 million worth of shares to help fund its operations. Shares of the company tumbled following that news. And that's something that investors should expect on an ongoing basis, especially given the competition it may face down the road.
2. The company doesn't have any moat
A moat is a defendable competitive advantage that can help a business fend off competitors. If a company has a strong moat, it can give the business a path for achieving sustainable, long-term growth. Without it, however, competition is likely to be fierce, especially if it's in a lucrative market -- like AI.
SoundHound's situation falls into the latter, as its voice AI platform may struggle to compete against heavyweights in the tech industry. Alphabet, Microsoft, and other tech companies are all investing heavily in AI, including voice capabilities. For a company such as SoundHound to compete among those giants, it's going to need to spend heavily and aggressively. But its resources don't compare to what those behemoths have at their disposal. This, in turn, exacerbates the concerns related to the company's cash burn. Without a moat, SoundHound may find it difficult to grab a significant share in the market.
Last quarter, which ended on March 31, the company generated $11.6 million in revenue, which grew at a rate of 73% year over year. While it's an impressive growth rate, it's still a modest amount of revenue in tech, which is why SoundHound is still unproven in this arena. And despite the revenue growth, its net loss increased by 20% to more than $33 million.
3. It is extremely volatile
When investors learned of Nvidia's stake in SoundHound earlier this year, interest in the tech stock took off. But that volatility is also what makes this a risky stock to hold. SoundHound's 30-day average volumes are significantly higher than they were a year ago. This is a stock that can put investors on a roller-coaster ride.
SOUN 30-Day Average Daily Volume data by YCharts
Should you invest in SoundHound AI stock?
If you're not comfortable with risk, SoundHound AI isn't a stock that will likely be suitable for your portfolio. The company still needs to prove that it can be a good long-term investment. The more prudent approach would be to see how the company grows in future quarters and if its bottom line and cash burn improve. If that happens, then it may be a good move to take a small position in the business.
But as of now, this may only be a suitable option for investors with a high risk tolerance given the volatility and uncertainty that comes with SoundHound's stock.
