With shares rocketing higher so far this year, SoundHound AI(NASDAQ: SOUN) demonstrates the millionaire-making potential of stock market investing. A $10,000 investment made at the start of 2024 would be worth $97,300 today. But can this explosive rally continue? Let's dig deeper to see if this artificial intelligence (AI) software stock still has gas left in the tank.
Since the launch of OpenAI's ChatGPT in late 2022, generative AI has been the hottest hype cycle on Wall Street. However, until recently, most of the winning companies seemed to be operating on the hardware side of the industry, supplying the graphics processing units (GPUs) and other data center equipment to train and run AI algorithms.
Over the long term, the industry will probably shift to consumer-facing software to generate the cash flow and profits needed to justify hardware purchases. Companies like SoundHound AI could represent the next phase of industry growth because of their potential for real-world utility.
SoundHound has been developing sound and voice recognition technology since its founding in 2005, initially focusing on a music discovery app. However, management quickly realized the synergy between this technology and large language models (LLMs) like ChatGPT. By combining the two technologies, humans can interact with machines in truly lifelike ways, potentially allowing businesses to replace human labor.
SoundHound's offerings include a restaurant voice assistant designed to automate small business phone lines by taking orders, providing menu information, and other services. The company also offers drive-thru automation services, boasting deals with high-profile restaurant clients like White Castle, Church's Texas Chicken, and Jersey Mike's Subs.
SoundHound's massive rally can be explained by its software's monetization potential. For most investors, it isn't much of a stretch to see how AI voice assistants could create value for restaurants or other applications. The market also expects interest rates to come down over the next few years, which could make it easier for small, unprofitable companies like SoundHound to access the financing needed to grow.
Third-quarter revenue jumped 89% year over year to $25.1 million as SoundHound continues to add more clients from restaurants to financial services. The company's sales mix is also increasingly diversified, with each industry contributing between 5% and 25% of total sales.
Image source: Getty Images.
That said, SoundHound isn't without challenges. Operating losses are expanding relentlessly (up 132% to $33.8 million in the third quarter), and with just $135.6 million in cash and equivalents on its balance sheet, management may eventually need to rely on equity dilution to raise the capital needed to continue growing the business.
However, while SoundHound's financing situation is tense, its biggest problem may come from competition. Voice recognition is common -- most of us are familiar with examples like Apple's Siri, a technology provided by Microsoft subsidiary Nuance Communications. Competitors can easily integrate their existing technology with LLMs and encroach on SoundHound's moat. Microsoft is likely the biggest threat because of its partial ownership of OpenAI, an advanced LLM developer.
While SoundHound is an exciting way to bet on the software side of the AI industry, investors should tread with caution. With a price-to-sales (P/S) ratio of 99, most of the company's growth potential is likely already priced in. For context, the S&P 500 has an average P/S ratio of just 2.8.
In 2025 and beyond, the market will have to reckon with SoundHound's relentless cash burn and weak economic moat. And shares could give back much of their recent gains. Investors looking to make millions in the stock market should probably avoid SoundHound shares for now.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
