After SoundHound AI Stock Soared as Much as 320%, 1 Wall Street Analyst Thinks It's Falling to $1. Here Are 3 Things Smart Investors Should Know. | The Motley Fool (2024)

Euphoria surrounding artificial intelligence (AI) has helped fuel the S&P 500 and Nasdaq Composite to record levels this year. Indeed, the "Magnificent Seven" stocks -- Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla -- garner the majority of AI hype and have collectively played a big role in pushing the market higher.

But outside of mega-cap tech, one small AI player in the voice-recognition market has emerged. Shares in SoundHound AI (SOUN -7.31%) soared as high as 320% earlier this year after news that Nvidia made an investment in the company.

Although the momentum has cooled a bit, SoundHound AI stock is still up more than 90% so far in 2024. Considering that SoundHound AI was a penny stock at the beginning of the year, investors may want to think twice before pouring into this unique AI opportunity.

A short seller called Capybara Research recently published a report forecasting that SoundHound AI stock was worth only $1 -- implying that the shares could crater by 75% from current trading levels. Although it's important to emphasize that short sellers try to benefit when a share price declines, I agree with Capybara Research that there are a number of risks surrounding an investment in SoundHound AI.

Let's dive in and assess why SoundHound AI may not be the most prudent opportunity in the red-hot AI industry.

1. The competitive landscape is intense

Although SoundHound AI may be the darling in the spotlight right now, AI-powered voice services are offered by a number of other companies.

Apple entered the niche through its acquisitions of Siri and Shazam. Shazam directly competes with SoundHound AI's music streaming app, while the Siri virtual assistant has become deeply integrated throughout Apple's hardware ecosystem.

One of the bigger use cases surrounding voice-recognition technology is the Internet of Things (IoT). In particular, Amazon's Alexa and Alphabet's Google Home smart appliances are examples of how each of these companies competes in the business.

Microsoft has also made quite the splash in the voice-recognition software market. In 2022, the Windows developer acquired Nuance for a whopping $20 billion. Moreover, OpenAI recently announced that it developed a voice mimicking service called Voice Engine.

Although Voice Engine is not yet commercially available, Microsoft's close ties to OpenAI could serve as a way for the company to more deeply penetrate the voice-recognition market down the road.

2. SoundHound AI is still very small

According to Statista, the total addressable market for AI-powered speech tools will reach roughly $50 billion by 2029. Considering the enormous opportunity, there should be room for many winners.

Although that may appear to be a positive indicator for SoundHound AI, there is more to unpack here. Tech giants like Microsoft and Apple carry tens of billions of dollars in cash on their balance sheets, providing them with unparalleled financial flexibility.

As a result, big tech has the financial horsepower to upend the voice-recognition software market at any time. This could pose a major threat to SoundHound AI, which is still incurring hefty losses.

SOUN EBITDA (Quarterly) data by YCharts.EBITDA = earnings before interest, taxes, depreciation, and amortization.

3. Don't take everything at face value

The trends in the chart above showcase that liquidity could quickly become an issue for SoundHound AI unless the company begins delivering profits.

But yet, if you look at SoundHound AI's reported financials, it may appear that the company is increasing revenue at an impressive rate. Moreover, the company's reported backlog may provide some assurance that cash burn will be gone sooner than later.

This dynamic is perhaps the most risky variable to assess. As I've noted in the past, SoundHound AI resorts to some financial shenanigans to paint a rosier picture than reality.

Specifically, notes in the company's filings explain that SoundHound AI accounts for termination fees from customer cancellations as a way to make revenue and margins appear better.

For example, SoundHound AI is pulling these cancellation fees forward once a customer departs. However, this is a non-recurring revenue source. By accounting for a lump-sum payment in one quarter, both the top and bottom lines will look as if they are growing organically -- when in reality they are not.

Regarding the company's backlog figures, management's commentary surrounding this metric makes it clear that they are estimating the future value of a multi-year contract that may not be entirely committed. This means that the company's growth outlook may not be accurate. In turn, projections from management should be taken with a grain of salt, as they're not as robust as it sounds.

Will SoundHound AI stock plunge to $1, as Capybara Research suggests? I can't say for certain where any stock will move next. However, the number of larger, better-capitalized competitors investing in voice-recognition technology, coupled with SoundHound AI's questionable accounting methods, give me enough reasons to avoid the stock.

Whether SoundHound AI plummets to $1 or even lower isn't the real issue. The bigger idea is that even though the company has garnered significant attention, it's clear that there are a number of risks associated with an investment in SoundHound AI. Sure, its partnership with Nvidia is exciting -- but SoundHound AI is just one of many companies working with the chipmaker.

While applications in voice recognition are an intriguing aspect of the AI realm, I see better opportunities than SoundHound AI. For now, I'd avoid the stock and keep a close eye on any momentum that could affect share price one way or the other.