Artificial intelligence (AI) has captured the attention of many tech investors over the past year. One small AI-related company that’s getting its fair share of enthusiasm as well as some scorn is the speech recognition company SoundHound AI (SOUN -2.20%).
After initial enthusiasm for the stock when it first went public in late April 2022 through a special purpose acquisition company (SPAC) merger, this AI stock has since lost nearly all its momentum.
Here are three things smart investors need to know about the company and why it may be best to stay away from this AI stock right now.
1. Three companies account for 67% of SoundHound’s sales
When I first began looking into SoundHound, the fact that just three companies generate two-thirds of the revenue for SoundHound was the first thing that jumped out to me. SoundHound hasn’t specified which customers account for such a large portion of its revenue, but it really doesn’t matter — 67% of total sales coming from three customers is too many eggs in one basket.
Image source: Getty Images.
Making matters worse, the percentage of overall sales coming from the three customers is up from a 61% share in 2021. That means that the company has become more dependent on these customers, not less.
With such a large percentage of its sales coming from just three customers, there’s significant risk here. If just one customer leaves for a competitor or even scales back its dependence on SoundHound, the company’s top line could be severely affected.
2. SoundHound isn’t profitable
When a company is in growth mode, it’s common for it not to be profitable. Young companies often take their revenue and reinvest it into the company, creating new products or services and spending money to market to potential customers. After a period of growth, they then focus their attention on profitability.
This formula works, but only if a company grows revenue quickly at the beginning. Unfortunately, that’s not happening with SoundHound. In fact, SoundHound’s revenue growth is slowing down.
In 2021, the company’s sales increased 63% to $21 million but only grew by 47% to $31 million last year. And this year, SoundHound’s management said sales will be in the range between $43 million to $50 million — which would be a 50% year-over-year increase at the midpoint of guidance. These are hardly eye-popping revenue growth percentages for an unprofitable company that needs to be making lots of sales and using the money to grow bigger.
SoundHound says its total addressable market in the voice AI platform space is $160 billion. That’s a massive opportunity, but SoundHound doesn’t appear to be taking full advantage of it based on the company’s revenue growth.
3. SoundHound’s stock is risky
All stocks have some level of risk, but it’s important not to take on too much risk. And SoundHound’s stock may have too much risk.
If the company’s sales were growing much faster and it wasn’t so dependent on just a few customers, then maybe opening a small position in it would be worth it. But that’s not the case right now, and I think it makes SoundHound’s shares pretty risky as a result.
The company’s share price has already sunk 79% since it first went public, but I would still wait a bit longer to see the final result of SoundHound’s 2023 revenue and if the company diversifies its customer base before I’d consider buying its stock.
AI will transform many industries, but that doesn’t mean every company with a decent AI product will come out on top. It’s probably best to give SoundHound more time to grow its business and prove it can keep the momentum going before you turn the volume up on this AI stock.
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
