SoundHound Stock Rides the AI Hype Train

One of the biggest moments to date in the evolution of artificial intelligence came in November 2022 when OpenAI, an AI research organization co-founded by Elon Musk to stop the machine apocalypse, released a conversational chatbot that many believe will start the machine apocalypse. ChatGPT is probably the closest we’ve come to the holy grail of general artificial intelligence, when computers can do their own thinking and human enslaving. The hype has continued to build since Google issued a “code red” at the end of December 2022 over this so-called existential threat to its search business. 

Another event happened back in November 2022 with much less fanfare. SoundHound (SOUN) quietly released its latest voice AI technology called Dynamic Interaction, a conversational AI that the Silicon Valley company is betting will help make it profitable by the end of this year. It could revolutionize the way we interact with computers for some of the most complex human tasks imaginable – like ordering a “double-cheeseburger, hold the mayo, and extra pickles on the side.”

About SoundHound Stock

As the saying goes, a rising chatbot lifts all AI companies. That’s certainly been the case for SoundHound stock, which is on an upswing this year after hitting an all-time low in its brief public life of just 0.92 cents per share on the same day the fur was flying at Alphabet headquarters. The price has rebounded to around $4 as of Feb. 6, 2023, with a market cap of about $800 million (and subsequently dropping the next day as we were posting this article). On the surface, it would seem this sudden surge in SoundHound stock price is a result of market mania over ChatGPT and anything remotely AI related. However, since it’s been more than a year since we originally covered SoundHound and its voice AI assistant tech, let’s see what’s been happening in the interim and whether retail investors are missing out.

Our piece ran before SoundHound completed its merger with a special purpose acquisition company (SPAC) in April 2022, valuing the combined entity at $2.2 billion, despite only about $20 million in 2021 revenue. The deal was supposed to net SoundHound about $219 million after paying off the lawyers, banks, and the mob rest. But redemptions by institutional investors in the SPAC cut the available cash by more than half:

After $85 million in losses through the first three quarters of 2022, SoundHound had about $33 million left in the bank, as of September 30, 2022. Yet the company announced last month that not only would it reduce costs by about 40% or $60 million, but it would be profitable by the end of this year and deliver revenue growth of more than 50%. So how does that math work?

How Will SoundHound be Profitable?

Well, it starts with laying off about half of your current workforce after already sending 10% of your employees to the unemployment line just a couple of months earlier. It also involves slowing down the R&D engine and revving up revenue growth now that the company’s AI voice platform is available in 25 languages. It also appears that SoundHound is pulling back on entering new markets to focus on its biggest revenue generator, which is licensing its technology in smart devices, TVs, and especially automobiles. Its other big focus will be on SoundHound for Restaurants, using its new Dynamic Interaction platform.

For those interested or understand such things: Dynamic Interaction uses the “twin technologies of fragment parsing – which breaks speech down to partial-utterances and processes them in real-time – and full-duplex audio-visual integration to create an instantaneous, next-generation experience.” We’re more interested in the results: Customers can supposedly order their meal in the same incoherent and disjointed way they normally would, and the AI is able to respond and edit the food order instantly. In the same Q3-2022 earnings report, SoundHound management compared itself to both Apple and Amazon when describing the technological achievement and total addressable market (TAM). So this is obviously big, people.

The Total Addressable Market for AI Voice Recognition

We’re probably not qualified to talk about the history-making milestone of ordering french fries with extra chili and cheese from a computer, so let’s stick to the financial picture, beginning with the TAM. SoundHound has consistently cited a TAM of $160 billion, based on a 2020 report by a market research firm called Juniper Research out of Basingstoke, UK, somewhere between Whitchurch and Camberley. In other words, BFE English countryside. However, the firm seems legit and is not just another content farm churning out market reports in Mumbai. So, let’s assume the number is somewhat reasonable, even though most of those content farms are estimating a much, much lower TAM over a longer time horizon.

Somehow this slide made it into the January 2023 investor deck at the same time that company announced it would be curtailing its pursuit of new markets. In other words, we should ignore the bottom half of the graphic. However, we have no way of recalculating the total addressable market because the original estimate of $160 billion is a black box. The U.S. restaurant industry alone was worth about $800 billion in 2021, so presumably the TAM for voice AI recognition is not inconsequential. It’s also not $160 billion. In fact, in the same investor deck, SoundHound says its opportunity in the restaurant business is just $1 billion+ globally. We’re actually going to side with the content farms and say the TAM is more likely in the $40 to $50 billion range toward the end of the decade.

How Does SoundHound Generate Revenue?

Time to revisit briefly how SoundHouse generates revenue. It makes money in three different ways:

• Product Royalties: A manufacturer pays SoundHound royalties for voice enabling a product based on volume, usage, or duration. The company collects royalties when Houndify is placed in a car, smart speaker, or an appliance, for example. This is where most of the money is currently coming from.
• Service Subscription. This is the software as a service (SaaS) subscription model that SoundHound hopes to grow with its food-ordering app. This is where the company hopes most of the money will come from in the future.
• Monetization Ecosystem: This revenue stream combines the first two, where the voice-enabled product directly accesses the SaaS business to generate new leads and transactions. For example, when the driver of a voice-enabled car places an order to a restaurant that’s also voice-enabled, SoundHound gets a cut of the action from the restaurant, which it shares with the car manufacturer. So far, this revenue stream hasn’t generated much money, other than from the SoundHound music identification app. In the future, the plan is to monetize revenue through a combination of advertising dollars from the music identification app, and from leads and transactions on voice-enabled products from voice-enabled services.

This is what the numbers from those three revenue streams look like for the first nine months of 2023:

There are a few things to unpack from these numbers. First, there seems to be decent, if volatile, international exposure. Second, 90% of revenues are from product royalties, which are not necessarily predictable, recurring revenue. For example, a $5.3 million chunk in 2022 is related to one customer in Korea for licensing revenue. And that brings us to one of the big red flags: customer concentration. For the nine months ended September 30, 2022, SoundHound had four customers that accounted for 77% of revenue. The year before, just two customers accounted for 57% of revenue.

Should You Buy SoundHound Stock?

That certainly helps us put SoundHound revenue in perspective. The company announced its preliminary 2022 results last month, even though it hasn’t released its year-end filings with the SEC. It is predicting revenues will be about $31 million, which is actually in line with the November 2021 SPACtacular investor deck forecast. In addition, SoundHound forecasts it will grow revenue by 50% this year and be profitable by Q4-2023. That’s nice, but it falls way short of the $110 million originally estimated in the same investor deck.

One key metric the company touts is its cumulative bookings backlog, which stood at $302 million, as of September 30, 2022, representing a 239% increase from a year ago. So, normally, these two words “bookings backlog” don’t necessarily go together. Backlog represents outstanding orders, while bookings refers to new sales that the company has contracted for over a certain period. For SoundHound, the company probably means bookings, because it has contracts ranging from one to seven years, with a roughly five-year weighted average contract length. So that works out to $60 million per year. Again, those numbers sound good until you consider that management originally estimated annual revenue of nearly $1.2 billion by 2026. You’re going to have to book more than that, Danno. Besides, regular readers know we only care about one thing – revenues.

On the plus side, SoundHound is building some interesting partnerships with the likes of companies like Toast. For example, SoundHound for Restaurants will integrate with Toast’s point-of-sale system, which will allow restaurants to accept voice orders from customers over the phone and transmit the order directly to Toast’s platform. The company also works with some major automotive OEMs by providing voice assistants in vehicles for customers like Mercedes-Benz, Honda, and Hyundai. Earlier this year, SoundHound announced its voice AI will now be deployed through something called Airmeez, which is a customer communications platform as a service for building custom intelligent virtual agents, notification and other communication solutions using a no-code drag-and-drop design tool. Apparently, that was the news that originally ignited SoundHound stock in the first place. It doesn’t take much these days.

How to Gauge AI Hype

There’s a finance theory called the efficient market hypothesis which loosely states all available information is priced into stocks. So, when stocks that are loosely related start moving together, that’s a sign that hype is driving prices. Stocks which happen to include the letters “AI” are inexplicably soaring in unison as the Robinhood types move their focus from gems like the near-bancrupt Bed Bath and Beyond to “AI stonks.” Our recent YouTube video on The Best AI Stocks covers this in more detail, but here’s the basic takeaway.

For serious investors, such hype is not good. That’s because if you’re long a company, you’re now being tempted to engage in market timing because it’s clear based on the returns seen below that AI hype is responsible for recent gains.

Each investor needs to consider their cost basis when deciding whether or not they want to engage in market timing. For example, when gene editing stocks soared on the back of some good news from one constituent, we used the opportunity to recover our entire cost basis across all our gene editing positions which still constitute 5% of our tech stock portfolio.

These are difficult decisions to make, and each investor will need to act based on their own convictions. Just remember, stocks that rise in unison also fall in unison. We’d expect that before this is over, the hype expands into other related “AI stocks” as the Reddit types expand their definition of AI beyond what’s on the tin.

Conclusion

This could be a busy year for AI stocks given the hype surrounding ChatGPT. While SoundHound has certainly been making some moves to tighten the ship and keep it afloat, the current surge in the stock price (now down about 10% as of 2:30 pm ET on Feb 7, 2023) is mostly a reflection of the momentary excitement around AI, though a double-cheeseburger does sound really good right now.

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