The 3 Biggest Risks of Owning SoundHound AI Stock
On the surface, SoundHound AI (NASDAQ: SOUN) looks like a small-cap stock with the promise of growing into a much larger company. Its voice recognition technology has attracted contracts with companies from numerous industries. It also received a significant investment from Nvidia.
Despite such interest, SoundHound stock comes with significant and surprising potential dangers. Investors should assess the following major risks before considering a position in this stock.
1. The lack of a competitive moat
SoundHound has attracted a notable client list despite being a small-cap stock. The company provides voice recognition capabilities to companies as diverse as Honda, Netflix, and Mastercard. Moreover, the Nvidia investment likely added to the company's credibility.
Unfortunately, these victories are probably not sufficient to appease worries about competing businesses, which in many cases are the world's largest tech companies. SoundHound investor Nvidia, as well as Apple, Amazon, Alphabet, and OpenAI, are among the companies developing voice recognition software.
Additionally, all of these companies except OpenAI are known for having cash positions far exceeding SoundHound's $1.7 billion market cap. That deficiency places SoundHound at a worrying disadvantage.
2. Staggering financial losses
Moreover, SoundHound's massive financial losses make it difficult to stay in business, let alone compete with trillion-dollar companies.
The company's financial statements outline this problem well. In the first quarter of 2024, SoundHound earned nearly $12 million in revenue, a 73% increase from year-ago levels.
That appears impressive until investors realize its costs and expenses were $40 million. Consequently, the comprehensive loss attributable to shareholders increased to $33 million versus $27 million in the first quarter of 2023.
Admittedly, few investors expect a promising start-up to earn a profit. Also, with $212 million in cash and equivalents, SoundHound can maintain the current pace of losses for around six more quarters.
Nonetheless, it likely means it will have to raise funds in the foreseeable future, and where it gets such funding should rightly concern shareholders.
3. Potential for shareholder dilution
Unfortunately for investors, one option SoundHound will likely consider for raising funds is issuing more shares. SoundHound has already relied extensively on this strategy. When it launched its IPO two years ago, less than 200 million shares were available. Today, the number of shares outstanding has grown to just over 329 million.
SOUN Shares Outstanding data by YCharts
Moreover, SoundHound holds around $85 million in long-term debt. While that is likely manageable, it is a relatively high debt burden considering its $155 million in stockholders' equity, making it less likely to become a significant source of new funding.
Ironically, the better the stock performs, the more likely SoundHound will issue more shares. Investors recently saw how a massive rally in GameStop stock reversed course after the company announced a new share issuance. Thus, achieving any sort of meme status is more likely to be a blessing to the company than to its shareholders.
Making sense of SoundHound stock
Given SoundHound's considerable risks, interested investors should treat this stock as a speculative play or avoid it altogether.
Indeed, it has attracted an impressive list of customers and investors. Unfortunately, it also faces numerous, well-funded competitors, and the massive losses probably mean the company will further dilute shareholders over time, especially if the stock moves significantly higher.
Ultimately, while SoundHound AI stock could bring considerable returns, the level of risk indicates investors are better off looking elsewhere for returns.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Mastercard, Netflix, and Nvidia. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
