Transcription
Ready to dive into the world of AI stocks and grow your wealth? SoundHound stock is making waves—sound waves, that is—but is it the right choice for your portfolio? We've been monitoring SoundHound stock for nearly six years and analyzing AI stocks for over a decade. Today, we'll uncover the reality behind the buzz and learn if this stock is your ticket to financial growth or just another empty promise.
In times of hype, we need to proceed very cautiously. The first myth we're going to debunk today involves a little-known stock called Nvidia. The quality of content from some of the mainstream pundits out there continues to slide as the market exhibits casino-like behavior. Here's a classic example of abundant misleading information for investors: they talk about how Nvidia owns 1.7 million shares of SoundHound stock. Indeed, that's true. Then they say, in a move that has impressed investors—well, maybe it impressed investors seven years ago when it happened back then, but certainly, it's less impressive today. We're going to look at why that is.
I also noted this bullet point here where they talk about how Apple, Google, and others present a threat if they can develop their own comparable technology. Well, that's BS because all these companies have speech recognition, voice recognition, and voice biometrics technology that they're working on. There are plenty of others out there that are working on technology that's a competitive threat. It's one of the reasons why SoundHound AI is so small.
When we first looked at the company, they were a voice assistant startup, and we noted here that they were founded in 2005. They've been around for nearly 20 years, so not very impressive volumes of revenue coming from a company that's been around that long. They initially raised funds and then went quiet for a while. Beginning in 2017, they saw a Series D $75 million round fronted by leading AI chip maker Nvidia. Others accompanying that round included Tencent, Daimler, Hyundai, and Orange. That's when Nvidia took their shares of SoundHound.
To see where those sit today, we can look in the SEC filing database at what's called 13Fs. We've simply filtered here on 13Fs, and the first they filed in February of 2024. The reason they did that is that when you have more than $100 million in assets under management, you need to file a 13F. We see the first one here in February of 2024. You see the five publicly traded companies that Nvidia held shares in. In previous pieces, we've talked about what each of these holdings might mean, but when it comes to SoundHound, you can see here we've looked at the most recent 13F from Nvidia and noted that the number of shares hasn't changed. Honestly, just if you gave shares to Nvidia to hold so you could end up on this list, that would probably be value-add enough.
You need to always put these Nvidia shareholdings into context because companies will do anything these days to get their name associated with Nvidia. This piece here by Motley Fool, another lackluster piece of commentary, was in March of this year. It says the investment Nvidia made in SoundHound was one of five that Nvidia made in tech companies related to AI in the fourth quarter of 2023. That's completely false, and we just pointed that out. This investment by Nvidia represents less than 1% of SoundHound's total equity and less than a tenth of a percent of Nvidia's cash on hand. It's pretty much meaningless, and that's why it sits there today doing nothing.
So, always separate hype from substance; that's very important. Now, SoundHound went public as a SPAC. We've been warning about SPACs since they debuted, and people say, "Why do you bring up old information?" That's because we want to hold these companies accountable for the promises they made to investors and didn't keep. SoundHound expects its full-year revenue to be in a range of $82 to $885 million. That's quite good—82% growth at the midpoint—but you need to consider what's organic and what growth has come from acquisition. We're going to look at that in detail now.
This growth still misses their SPAC projections by 72%, and now they're projecting 2025 revenues to be in a range of $155 to $175 million. What's the likelihood they hit that 98% revenue growth target, especially when you consider they haven't been very good at hitting targets in the past? That's why that's relevant.
As a hiring manager, you're giving somebody feedback. They say you should use the sandwich technique: something good, something bad, something good. So we're going to say something good about SoundHound AI. Since the last time we evaluated this stock, when we took a good look at what progress they're making, we noted that for a nearly 20-year-old company with such an extensive list of clients, why would they have such high customer concentration risk? If the product's so great, all their customers should be finding equal value in it, right? So that was a showstopper for us.
Here you can see how they had a customer that accounted for nearly half of their revenues in 2023. Well, that's largely been resolved with this acquisition, so only 12% of their revenue is now attributed, at least last quarter, to the company's largest customer. That brings us to the acquisitions they made when they looked to acquire growth, presumably because organic growth wasn't happening as much as they would expect it to for them to hit their targets.
Here you see they acquired 75% revenue growth year-over-year from last quarter, which was the first quarter they combined the financials and gave us a picture of what the combined companies looked like. The first thing to note here is that gross margins fell that quarter from 73% to 49% year-over-year. Now, gross margins for SoundHound have been on a decline for a while. Gross margins are an indicator of the potential for profitability. It's okay for a company to be not profitable for a long time as they move to rapidly capture market share, but gross margins tell you the potential profitability that might be realized down the road. 49% is quite low for a software business.
They attribute this decline primarily due to the acquisitions, including a mix of lower-margin call center agent business. Well, that was relating to Sync 3. I certainly hope they're not doing AI with Manila call center agents because companies have done that in the past, and it's really not AI. They talk about the amortization of acquired intangible assets.
What we can then do is break out their organic growth from the acquired growth. We've done that here in the chart titled "SoundHound's Organic Revenues," which shows the Amelia and Sync 3 revenues backed out. We were able to do that because they provide that information in the 10-Q. These two bullet points then lead to the table right there that shows SoundHound's organic revenues last quarter were $6.77 million—very low. That shows that without those acquisitions, they would not be coming close to the revenues that they hope to realize next year.
I think that of that $150 million target, according to this article by TechCrunch, $45 million is going to come from Amelia. We'll see if that actually happens, but SoundHound paid $80 million in cash and equity for Amelia. One critique of that acquisition would be that Amelia had raised, according to TechCrunch, around $189 million, and $175 million of that came in March of 2023. Why, less than two years later, is SoundHound paying such a discounted price for the company? What went wrong there? Well, we don't know; we can only speculate, but it's worth noting.
Also, the combined company says here will have $160 million in cash and $39 million in debt when the deal closes. I wanted to touch on the cash situation at SoundHound. We always look at cash burn and then calculate a runway. For the trailing 12 months, we see a cash burn of around $90 million. SoundHound had ending cash last quarter of $136 million, so about 1.5 years of runway left. But they'll be able to extend that because they've been selling a lot of shares at the market—what they call "at-the-market arrangements." That's where this financing cash flow comes from.
What you can do here is go into their financials and take a look at the dilution that's taking place. This single entry issuance of Class A common stock under the sales agreement—that's the at-the-market agreements they have. They have two of them, and this single sale here in this timeframe accounted for a 32% increase in dilution. When we plot that over time, you can see they had their SPAC merger complete in April of 2022. From December of 2022 to September of 2024, their Class A shares outstanding increased over 100%. So, all things being equal, that means if you had a share that was worth $10, it would be worth $5 based on this massive amount of dilution that isn't being typically recognized by retail investors.
When we look at the money that's coming from the sale of those shares, here you can see $287 million—that's a lot. Of that, they took $175 million and paid down some term loans—that's good—and Amelia's debt, which they acquired when they acquired Amelia, and then left them with $136 million.
When we consider the valuation of SoundHound stock, I wanted to plot their simple valuation ratio over time. This is just market cap divided by annualized revenues, and it's similar to price-to-sales, except we use last quarter times four to annualize that. It's more responsive. Plot that over time, and you see that SoundHound is very overvalued. It also is volatile; you see these waves of volatility. So if you're interested in holding the stock, you clearly wait until there's a reasonable valuation before you move in. For us, we don't invest in any stock with a simple valuation ratio higher than three times our catalog average, which is six. So that would be 18. I've marked that here on this chart. Who wouldn't be interested in SoundHound anyway but wouldn't invest in anything above 18?
Now, I came across this interesting chart presented by the head of investing strategy over at Schwab, and she noted the price-to-sales for the information technology sector in the S&P 500 plotted over time. You see it's quite high at the moment, nearing nine. Well, in that case, if you're using this price-to-sales metric, you might say, "Well, two times that," right? So it's just important to have a rule that you use to not overpay for stocks that are being hyped, as SoundHound is a very searched-for stock.
I wanted to touch on the short report findings. I think there were several short reports issued on SoundHound, and we covered those in our last piece on the company. This first piece here on bookings—you know, we never even consider bookings or care about it much at all—and they pointed out management's fictional projections. Well, we're going to see this year how well management can perform based on the lofty revenue growth expectations that they've set.
But also very concerning were the revenue recognition issues recognized as a critical audit matter when PWC audited their financials in the 2023 10-K, which ended up being delayed but then reported material weaknesses in internal controls. This is after they had their previous accountant resign and quit auditing public companies after some failed SPACs and accused frauds and pump-and-dumps. So that's not good baggage to have. But when we look for some closure around that, we don't see that. This statement most recently says they actually identified material weaknesses in the reporting system for Amelia when they did their 2023 audit. That's not good.
Now you have acquiring material weaknesses; they need to get this stuff cleaned up. Another point of contention we had—and this is no longer the case, which is good—is that product royalties made up 96% of revenues. We noted this before, and we also noted how they recognized product royalties was a point of contention with their accounting firm. They had this target where they wanted to hit this year: 25% of total revenues be royalties, and they actually got that down to 47%. So a bit off their target, but you can calculate that yourselves.
Here you see service subscriptions—this is in the 10-Q or 10-K. You can also use this entry as a proxy for how well their acquisitions are working out because this largely represents Amelia and Sync 3. So that's good, right? We can track how those are working out for the company. Also notable here is how those acquisitions really bumped up their revenues in the Americas, so that's good to see.
Now, coincidentally, I'm not sure why, but whenever you have companies selling a lot of shares at the market, there's a lot of cheerleaders. I don't know why that is, but we want to make this very clear: we never short stocks. We don't have a dog in the race. We only covered SoundHound stock because we've been covering this company long before all the 25-year-old life coach YouTube analysts were old enough to drink.
Some takeaways here: the very aggressive revenue targets laid out by the company should be watched quite closely. Even if they hit these aggressive targets—and we've plotted these in this chart—the red bars represent what they're expecting to do, and we've, of course, broken up the expected growth equally over quarters, as you can see for the four quarters of 2025. In the next quarter, they're expecting quite a boost as well. But even if they have $46 million a quarter, which is what you would forecast at the end of 2025, that's a simple valuation ratio of 18. So it's right at the cusp of what we'd consider investing in; it would be almost too richly valued.
The idea is that this is a very richly valued company, and we'd like to see some closure on all these material weaknesses they've been reporting—that would be nice. Also, watch their gross margins and operating margins for synergies in particular. You'll see a lot of synergies in operating margins, but watch gross margin very closely. They say, "Well, we expect that to improve." Well, make sure that it does. The acquired companies here seem to be masking a decline in revenues for SoundHound, and that's something that is a bit of a concern.
So this isn't a buy for us; it's a wait-and-see. We're going to give it a year and see how they can do and check back in after that. Now, you need to be very careful with all the AI hype out there about companies that are trying to attach onto that and get in front of shareholders, pushing the AI message. The AI hype is very real. We put together a piece on how you might avoid the AI pretenders and the stocks that are being pumped versus the companies that actually have a valid AI value proposition. So be sure to watch that next.
Thanks so much for taking the time to watch this video today.