SoundHound AI’s stock price has taken a beating over the past six months, shedding 39.8% of its value and falling to $6.45 per share. This might have investors contemplating their next move.
Is now the time to buy SoundHound AI, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is SoundHound AI Not Exciting?
Even with the cheaper entry price, we’re cautious about SoundHound AI. Here are three reasons why SOUN doesn’t excite us, plus one stock we’d rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For software companies like SoundHound AI, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
SoundHound AI’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 40.6% gross margin over the last year. Said differently, SoundHound AI had to pay a chunky $59.41 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. SoundHound AI has seen gross margins decline by 31.8 percentage points over the last 2 years, which is among the worst in the software space.
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
SoundHound AI’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
SoundHound AI’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 57.9%, meaning it lit $57.89 of cash on fire for every $100 in revenue.
Final Judgment
SoundHound AI isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 11.1× forward price-to-sales (or $6.45 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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