SoundHound AI: More Compelling After Purchases – Upgrade to Speculative Buy (SOUN)

SOUN’s investment thesis remains on the speculative side, albeit more compelling after the cumulative purchases

We previously covered SoundHound AI, Inc. (NASDAQ:SOUN) in June 2024, discussing why we chose to reiterate our Hold (Neutral) rating despite the sharp drop in share price from the March 2024 peaks, severely underperforming the broader market.

Given that the stock still trades at a significant premium to its generative AI SaaS peers, combined with its nascent startup stage, propensity for share dilution, and FQ1’24 impacted margins from the recent acquisition, we thought it might be more prudent to wait and watch his execution a little longer.

SOUN YTD share price

Since then, SOUN has traded mostly sideways between $3.90 and $6.20, with some of the volatility attributable to 24.8% short interest and market-wide rotation in high-growth stocks. mid July 2024.

Pessimistic feelings are aggravated by NVIDIA ( NVDA ) tougher QoQ/YY comparisons and Super Micro Computer ( SMCI ) delayed 10K annual report filing, which may trigger further cooling in market sentiment around generative AI, exacerbated by perceived slower AI returns in Microsoft (MSFT).

This is despite SOUN’s FQ2’24 earnings call and acquisition of highly strategic startup Amelia AI.

For reference, the SaaS company reported revenue of $13.46M (+16.1% QoT/ +53.8% YoY), adj EBITDA of -$13.8M (+10.4% QoT/ -37, 3% YoY) and accumulated multi-year subscriptions/bookings of USD 723m (+6% YoY/ +113.2% YoY).

These metrics continue to show strong demand for its voice AI solutions across various end markets, including customer service in the food industry and digital assistant in the automotive industry, along with the partnership with Perplexity to bring next-generation LLMs to SoundHound Chat AI in everyone. phones/ cars/ smart devices.

On the one hand, SOUN’s widening losses cannot be ignored, with gross margins deteriorating to 66.5% (+1pts ToT/ -13.5 YoY) largely attributable to its growing business with a lower margin of call center agents from the SYNQ3 acquisition.

Combined with the sharp increase in operating expenses to $35.44M (-11.6% QoT/ +40.4% YoY), it’s no surprise that the SaaS company continues to report -102.5% in adj EBITDA margins (+30.3 points ToT/ -10 YoY), with it highlighting its lack of operational scale.

On the other hand, SOUN has already announced the acquisition of Allset by June 2024 – a food ordering platform with nearly 7,000 US restaurant partners and Amelia AI by August 2024 – with numerous existing customer service contracts for Enterprise Conversational AI in finance, insurance. , retail and healthcare sectors globally.

These efforts naturally build on the SaaS company’s existing voice AI capabilities in the automotive and smart device market, triggering an opportunistic tripling of the total addressable market to nearly $250 billion by 2026 and ultimately , an accelerated top/bottom line growth.

As a result, despite the fact that Amelia AI is still in the startup stage and the likelihood of a higher cash burn in the near term, it is not surprising that SOUN stock appears to be well supported at the recent low of $4.80.

Either way, the SaaS company remains well-capitalized to support its growth trajectory, based on its $201M net cash position on its balance sheet through FQ2’24 (-11% QoT/ +61.5% YoY) and of inherently zero debt, partially attributed to the increase in dilutive capital to 331.83 million shares outstanding (+45.24 million t/y/ +111.06 million y/y).

While FQ3’24 may result in a moderate deterioration of the balance sheet, pro forma at about $160 million in cash and $39 million in debt, SOUN already expected to generate annual revenue of more than $150 million by in S2’25, with potential for “higher”. profitability”.

Advance consensus estimates

As a result, it’s no surprise that the consensus has already raised its forward estimates, with SOUN expected to generate accelerated top-line growth at a CAGR of +82.1% through FY2025, compared to initial estimates of +49 .7%.

This comes while reporting narrower negative profit margins, likely to break even in the next few years, and ultimately achieving its ambitious long-term goal of “30%-plus business of EBIT margin profile”.

So, is SOUN Stock a buysell or keep?

SOUN 2Y share price

For now, SOUN has had increasingly bullish support from the April 2024 bottom, with the stock currently looking well-supported at $4.80.

SOUND Ratings

The moderation seen at SOUN FWD EV/Revenue of 13.63x and FWD Price/Sales of 15.34x is also very evident compared to the YTD average of 17.99x/18.68x and YTD peak of 39 .76x/39.63x.

Even when we compare SOUN with accelerated top-line growth prospects at a CAGR of +82.1% through FY2025 to the other generative AI SaaS stocks like C3.ai ( AI ) at FWD EV/Sales of 5 .92x with expected top-line growth at +22.6%, BigBear.ai Holdings, Inc. (BBAI) at 3.1x/ +12.3% and Palantir (PLTR) at 24.23x/ +22.3%, it looks like the former is no longer expensive here.

As a result, we are cautiously upgrading our rating on SOUN stock to speculative buy, albeit with numerous caveats.

First, investors may want to watch the stock move for a little longer and buy only if bullish support at $4.80 remains robust in the short term.

Otherwise, with stock market sentiments getting greedy and the McClellan Volume Summation Index rising to 1,638.70x (vs. neutral at 1,000x), we may see a possible pullback to the established support levels of 4, $30 – implying a downside of -12% from current levels.

Second, it goes without saying that SOUN’s stock price movement remains extremely volatile, attributed to its high short interest and mixed market sentiment around generative AI stocks in general.

As a result, while the SaaS company’s rising stock offers great insights into its long-term top-line/bottom-line recognition, its negative profit margins remain a big concern, one that could trigger painful stock corrections assuming a extended path to break-even and/or additional cash burn/equity dilution.

Therefore, we believe investors may want to size SOUN against their existing portfolios, keeping it small to protect against extreme price swings, depending on their risk appetite.