Ticker: SOUN

Market Capitalization: $1.72 Billion
Enterprise Value: $1.53 Billion
Shares Outstanding: 358.73 Million
Sector: Technology
Industry: Artificial Intelligence – Voice Recognition
Analysis as of: September 17, 2024

1. Company Overview

SoundHound AI, Inc. is a pioneering company in the development of voice artificial intelligence (AI) solutions. Founded in 2005 and headquartered in Santa Clara, California, SoundHound AI specializes in creating advanced conversational interfaces and voice recognition technologies. The company’s flagship products include:

• Houndify Platform: A comprehensive suite of tools that enables brands to build and deploy conversational voice assistants. It offers APIs for text and voice queries, support for custom commands, an extensive library of content domains, software development kits (SDKs), collaboration capabilities, diagnostic tools, and built-in analytics.
• SoundHound Chat AI: Integrates with various knowledge domains to provide real-time data such as weather, sports, stock information, flight statuses, and restaurant details.
• SoundHound Smart Answering: An AI-powered voice assistant designed for customer establishments, enhancing customer service through intelligent and personalized interactions.
• CaiNET and CaiLAN Software: Utilize machine learning to optimize query handling and response accuracy across different domains.
• Dynamic Interaction and Smart Ordering: Real-time, multimodal customer service interfaces and voice assistants tailored for industries like restaurants.

SoundHound AI caters to diverse sectors, including automotive, television, Internet of Things (IoT), and customer service industries, aiming to deliver high-quality conversational experiences to businesses and their customers.

2. Financial Performance

a. Revenue and Growth

• Trailing Twelve Months (TTM) Revenue: $55.47 Million
• Year-over-Year (YoY) Revenue Growth: +53.47%

SoundHound AI has demonstrated impressive revenue growth, increasing from $7.68 Million in 2019 to $55.47 Million in the TTM period ending June 30, 2024. This consistent high growth rate underscores the company’s expanding market presence and increasing demand for its AI-driven voice solutions.

b. Profitability

• Net Income (TTM): -$110.16 Million
• Earnings Per Share (EPS, TTM): -$0.40
• Profit Margin: -195.65%
• Return on Equity (ROE): -82.62%
• Return on Assets (ROA): -21.43%
• Return on Invested Capital (ROIC): -26.66%

SoundHound AI is currently operating at a loss, with a net income of -$110.16 Million and a negative profit margin of -195.65%. The negative ROE and ROA indicate that the company is not generating profits from its equity or assets. The ROIC of -26.66% reflects inefficient use of invested capital to generate earnings. These profitability metrics suggest that SoundHound AI is in a growth phase, heavily investing in research and development to expand its product offerings and market reach.

c. Cash Flow

• Operating Cash Flow (TTM): -$74.50 Million
• Free Cash Flow (FCF): -$74.94 Million
• Free Cash Flow Per Share: -$0.21
• FCF Margin: -136.09%

SoundHound AI is experiencing negative operating cash flow and free cash flow, indicating that the company is spending more cash on operations and capital expenditures than it is generating from its core business activities. This negative cash flow situation underscores the company’s reliance on external financing to sustain its growth initiatives.

d. Balance Sheet

• Total Assets: $266.67 Million
• Total Liabilities: $42.73 Million
• Total Debt: $4.52 Million
• Cash & Cash Equivalents: $200.16 Million
• Net Cash Position: $195.63 Million
• Current Ratio: 8.77
• Debt-to-Equity Ratio: 0.02
• Altman Z-Score: 9.67

SoundHound AI boasts a strong balance sheet with a substantial net cash position of $195.63 Million, indicating more liquid assets than debt. The exceptionally high current ratio of 8.77 reflects excellent short-term liquidity, ensuring the company can comfortably meet its short-term obligations. The minimal Debt-to-Equity ratio of 0.02 signifies very low financial leverage, reducing financial risk. The Altman Z-Score of 9.67 suggests a very low probability of bankruptcy, highlighting the company’s robust financial stability despite its current unprofitable state.

3. Valuation

• Price-to-Earnings (PE) Ratio (TTM): N/A
• Forward PE Ratio: N/A
• Price-to-Sales (PS) Ratio: 24.00
• Forward PS Ratio: 19.66
• Price-to-Book (PB) Ratio: 7.46
• Price-to-Free Cash Flow (P/FCF) Ratio: N/A
• Enterprise Value (EV): $1.53 Billion
• EV/EBITDA: 4.45
• EV/EBIT: 6.98
• EV/FCF: 6.97
• PEG Ratio: N/A

SoundHound AI’s valuation metrics present a mixed picture. The high Price-to-Sales ratio of 24.00 suggests that the stock may be overvalued relative to its current revenue. However, the Forward PS ratio of 19.66 indicates expectations of revenue growth in the future, which could justify the current valuation. The Price-to-Book ratio of 7.46 reflects a premium over the book value, possibly indicating strong intangible assets or investor confidence in the company’s growth prospects. The EV/EBITDA and EV/EBIT ratios are relatively low, suggesting that the company’s enterprise value is modest compared to its earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings before interest and taxes (EBIT), respectively. These metrics may present an attractive entry point for value-oriented investors, provided the company can transition to profitability.

4. Market Performance

• Current Stock Price: $4.76
• 52-Week Range: $1.49 – $10.25
• 52-Week Price Change: +113.33%
• Beta: 3.07
• Average Volume (20 Days): 7,066,437
• Relative Strength Index (RSI): 50.42

Over the past year, SoundHound AI’s stock price has surged by approximately 113.33%, reaching the upper end of its 52-week range. The high Beta of 3.07 indicates that the stock is significantly more volatile than the broader market, making it susceptible to larger price swings. The RSI of 50.42 suggests that the stock is neither overbought nor oversold, positioning it for potential upward or downward movement based on market sentiment and upcoming earnings performance.

5. Financial Health and Risks

a. Liquidity:

• Current Ratio: 8.77
• Quick Ratio: 8.62

SoundHound AI maintains exceptional liquidity, with the current ratio indicating the ability to cover short-term liabilities almost nine times with current assets. The quick ratio of 8.62 further confirms that the company has ample liquid assets to meet immediate obligations without relying on inventory.

b. Leverage:

• Debt-to-Equity Ratio: 0.02
• Debt-to-EBITDA Ratio: N/A
• Debt-to-FCF Ratio: N/A

The company employs an extremely conservative leverage strategy, as evidenced by the negligible Debt-to-Equity ratio of 0.02. This low leverage minimizes financial risk and indicates that the company is not heavily reliant on debt financing.

c. Bankruptcy Risk:

• Altman Z-Score: 9.67

With an Altman Z-Score of 9.67, SoundHound AI is well above the threshold of 3, indicating a very low probability of bankruptcy. This high score underscores the company’s strong financial health and ability to withstand economic downturns.

d. Operational Risks:

• Revenue Decline: Although the TTM revenue shows significant growth, recent YoY revenue has declined by 16.73%, raising concerns about market demand, pricing pressures, or operational inefficiencies.
• Profitability Challenges: The company is currently unprofitable, with substantial losses impacting investor confidence and financial sustainability.
• High Volatility: A high Beta of 3.07 suggests that the stock is highly volatile, which can lead to significant price fluctuations.
• Short Interest: With 22.43% of outstanding shares sold short and a short ratio of 3.48 days to cover, SoundHound AI is subject to potential short squeezes, which can lead to rapid price increases but also increased volatility.

e. Market Risks:

• Technological Competition: The AI and voice recognition sectors are highly competitive, with rapid technological advancements. SoundHound AI must continuously innovate to maintain its market position.
• Regulatory Risks: As a technology company, SoundHound AI may face regulatory challenges related to data privacy, security, and AI ethics, which could impose additional compliance costs or operational constraints.
• Economic Downturns: Economic slowdowns can impact IT spending and investment in AI technologies, potentially reducing demand for SoundHound AI’s solutions.

6. Conclusion and Investment Considerations

Pros:

• Strong Revenue Growth: Consistent high YoY revenue growth of over 50% indicates expanding market presence and increasing demand for AI-driven voice solutions.
• Excellent Liquidity: High current and quick ratios provide a strong buffer against short-term financial obligations.
• Low Leverage: Minimal debt levels reduce financial risk and interest obligations.
• Market Potential: Growing adoption of AI and voice recognition technologies across various industries presents significant growth opportunities.
• Attractive Valuation Metrics: Low Price-to-Sales ratio suggests potential undervaluation relative to revenue.

Cons:

• Unprofitability: Significant net losses and negative profit margins highlight ongoing challenges in achieving profitability.
• High Volatility: A high Beta indicates the stock is prone to large price swings, increasing investment risk.
• Revenue Decline: Recent YoY revenue decrease raises concerns about sustaining growth momentum.
• Short Interest: High short interest (22.43%) can lead to increased volatility and susceptibility to short squeezes.
• Operational Risks: Dependence on technological innovation and facing intense competition in the AI sector.

Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own research or consult with a financial advisor before making investment decisions.