SoundHound AI has a lot of growth potential, but this stock also comes with a lot of risk.
Shares of artificial intelligence (AI) company SoundHound AI (SOUN 1.45%) have fallen 8% in the past six months as excitement about the stock has waned. Voice AI companies are growing at a significant pace, but their losses are also increasing.
The stock has more than doubled in value this year. However, with a market capitalization of just $1.7 billion, investors could still see significant returns if the business continues to grow and become more profitable.
However, this potential comes with its own risks, so there are three charts you should review before considering investing in SoundHound AI.
SoundHound’s profit margin has not improved much.
Profitability is a big concern for SoundHound AI. As business grows, so do losses. Second quarter sales increased 54% year over year to $13.5 million, but net loss increased 60% to $37.3 million. Looking at the margin trends below, it’s not clear when (if at all) the company will eventually break even.
Data by YCharts.
Negative profit margins are not uncommon for companies in the early stages of growth, but investors should be aware of this. Continuing losses not only weigh on the business, but also increase the likelihood of future dilution.
The company has significantly increased the number of shares
Dilution is another risk for investors who buy stock in unprofitable companies. The company needs capital to fund its day-to-day operations and growth goals, but it doesn’t come from its core business. Instead, managers must rely on debt or issue stock to raise capital.
As a result, SoundHound’s market share has increased significantly in recent years.
Data by YCharts.
The company is already burning through cash, having shed $74.5 million in operating cash over the past 12 months. If cash flows don’t improve significantly, investors should brace for the prospect of further dilution, which could put downward pressure on the stock.
Higher short-term interest rates mean more volatility is likely
SoundHound faces many competitors in AI voice services. You may be experiencing strong growth today, but that does not mean you have established a sustainable and defensible competitive advantage in the market. And many investors are betting on the company, expecting it to fail. This is also evident from the high short interest on stock prices.
Data by YCharts.
If more short sellers bet on Soundhound, it could put further downward pressure on the stock. If the company doesn’t show improvement in cash flow or profitability, more investors could short the stock.
High short interest suggests investors should expect greater volatility, which increases the overall risk of the stock.
Is SoundHound AI stock a buy today?
Further complicating matters is Nvidia’s disclosure of a stake in SoundHound earlier this year. Without the news that Nvidia invested in the business, the stock wouldn’t be as strong or as popular as it is.
Explaining the hype is not an easy task. I’m not very optimistic that SoundHound will be able to shore up its finances at the same time as big tech companies with huge balance sheets are churning out competing voice AI platforms of their own. AI stocks may be worth keeping on your watch list, but it’s hard to say they’re a good buy at this point.
David Jagielski has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
