SoundHound AI Inc. (NASDAQ: SOUN) rallied as much as 25% on Monday after reporting $29.1 million in revenue for its first financial quarter.
On the surface, the number looks exceptionally positive. After all, it translates to a more than 150% growth on a year-over-year basis.
However, a deeper dive into SOUN’s Q1 earnings suggests it shouldn’t be sufficient for investors to dive headfirst into SoundHound stock.
SoundHound’s organic growth remains behind the curtains
SoundHound’s first-quarter release confirms it’s growing at an unbelievably fast clip – but much of it is related to the acquisitions the company has made over the past year.
Overreliance on acquisitions for growth makes it incrementally more challenging for investors to gauge the “real” performance of a company.
Why? Because often, companies on a buying spree do not report their organic growth rates, which is also the case with SoundHound.
So, investors currently have minimal insight into how SOUN’s original products and services are performing.
There’s no way to know if the core business is thriving or stagnating.
That’s perhaps one of the reasons why H.C. Wainwright lowered its price target on SoundHound stock to $18 after the company’s Q1 earnings report.
SOUN continues to push back its profitability timeline
Another major concern with owning SOUN shares at current levels is a lack of profitability.
Originally, the voice AI platform set out to turn positive on an EBITDA (adjusted) basis in the final quarter of 2023.
Then last year, its management revised expectations, aiming for positive adjusted earnings before interest, taxes, depreciation, and amortization in 2025.
However, SoundHound’s adjusted EBITDA still stands at negative $22.2 million at writing.
So, one may question the company’s ability to achieve that milestone by the end of this year – and even if it does, a case can be made for it being related to the buyouts, especially of Amelia for $80 million in 2024.
Note that SoundHound stock does not currently pay a dividend, appears to be any more attractive either.
SoundHound stock faces intense competition in voice AI
Finally, SoundHound shares remain unattractive at the current, post-earnings elevated levels also because the Nasdaq-listed firm faces intense competition in the conversational AI.
Granted, the voice AI market is broadly expected to be massive. But remember that SOUN is up against the big tech names, including Amazon, Google, Apple, and even Microsoft, at least in the automotive segment.
These titans have a tonne of more cash to advance in conversational AI. Therefore, any competitive advantage that SoundHound may currently have could prove insufficient in maintaining the firm’s revenue growth and generating meaningful profits over the long term.
Note that Wall Street currently has an average price target of $11.79 on the AI stock, which doesn’t represent a meaningful upside from here.
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