Over the past six months, SoundHound AI’s shares (currently trading at $6.74) have posted a disappointing 17.5% loss, well below the S&P 500’s 11.7% gain. This may have investors wondering how to approach the situation.
Is now the time to buy SoundHound AI, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is SoundHound AI Not Exciting?
Even though the stock has become cheaper, we’re cautious about SoundHound AI. Here are three reasons why there are better opportunities than SOUN, plus one stock we’d rather own.
1. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
SoundHound AI’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
SoundHound AI’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 57%, meaning it lit $57.03 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
SoundHound AI burned through $115.9 million of cash over the last year. With $202.8 million of cash on its balance sheet, the company has around 21 months of runway left (assuming its $5.44 million of debt isn’t due right away).
Unless the SoundHound AI’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of SoundHound AI until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
SoundHound AI’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 11.2× forward price-to-sales (or $6.74 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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