This Is the Biggest Problem With SoundHound AI Stock
Key Points
SoundHound's recent quarterly revenue was 10 times what it was when it went public back in 2022.
The company has leaned heavily on acquisitions to grow its top line.
A lack of profitability may be keeping investors away.
SoundHound AI (NASDAQ:SOUN) has been experiencing strong growth this year, as it looks to be a big player in the voice artificial intelligence (AI) market. It has broadened and diversified its business over the years, with revenue now coming from many different sectors of the economy.
However, despite the strong growth, the tech stock continues to struggle. This year, even as it's posted record numbers, it has fallen by around 35%. But the sell-off isn't all that much of a mystery for investors who have taken a closer look at the company's financials results; SoundHound may be leaning on acquisitions too heavily.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
Image source: Getty Images.
Why massive revenue growth isn't enough to give SoundHound's stock a boost
Last month, SoundHound's CEO Keyvan Mohajer touted the company's exceptional growth, pointing out that its recent quarterly revenue was 10 times what it was when the stock went public back in 2022. And with strong demand for the company's voice and agentic AI solutions, the future for the business remains promising.
But here's why investors may not be all that enamored with the results. For one thing, it's hard to decipher the company's organic growth rate, which reflects how well the existing business is doing. Acquisitions have given the company's top line a boost and, in doing so, have made it difficult to determine the strength of the core business. Through the first six months of the year, SoundHound's revenue has risen by more than $34 million, which is an impressive increase of 48% year over year. However, much of that increase came from its subscription revenue, which the same company says was "mainly driven by revenue from acquisitions in the Americas."
Meanwhile, the company's loss from operations totaled just under $66 million during the past two quarters, and that's even with the company getting a $43 million boost from a change in the fair value of its contingent acquisition liabilities. It's a concerning sign that even though the business is growing fast, it isn't making much progress toward profitability.
SoundHound's stock could still go far lower
While SoundHound's stock hasn't been doing well this year, it's not necessarily cheap enough where it's become a no-brainer buy. Given its lack of profitability and constant pursuit of acquisitions, there is the risk that the business will continue incurring losses and burning through cash in the months ahead, which may result in stock offerings and dilution for existing shareholders.
Without proof that the AI business is growing organically or that at least it's making serious strides toward profitability, the stock may continue to struggle. For now, the safest option with SoundHound AI is to take a wait-and-see approach.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends SoundHound AI. The Motley Fool has a disclosure policy.