Does SoundHound AI’s impressive revenue growth make up for the growing losses?

Fast-growing companies can make interesting investments. The more growth they generate, the more excitement they can draw from investors along the way. SoundHound AI (SOUND 2.03%) offers artificial intelligence (AI) voice services that can help improve customer experiences in many ways, such as improving the ordering process at drive-thrus or making it easier to ask questions to AI chatbots while driving.

There’s plenty of potential for SoundHound AI, which is why many investors were bullish on its prospects, especially after learning earlier this year that Nvidia was an investor in the business. But while SoundHound AI grew its business at a rapid pace, its losses and cash burn accelerated. Should investors be worried or could this be a solid AI stock to buy right now?

SoundHound’s growth rate remains above 50%

For an up-and-coming AI stock like SoundHound AI, what draws a lot of attention from investors is its impressive growth rate. Since its sales are not as high as they would be for a megacap stock, there is hope that its valuation can take off if the company continues to grow its operations at a high rate.

SoundHound AI’s revenue during its most recent quarter (which ended in June) totaled $13.5 million. While that may not seem like much compared to many larger growth stocks, what stood out was the company’s impressive year-over-year growth rate, with sales up 54%. Its growth rate has been impressive in recent quarters as spending on AI-related products and services has remained high.

SOUN Revenue Data (Quarterly Yearly Growth) by YCharts

Company growth may remain strong. SoundHound AI recently announced plans to acquire Amelia, an enterprise AI software company that it says will allow it to expand its reach into new verticals, including healthcare, insurance, financial services and other industries. Combined, the two businesses are expected to generate at least $150 million in revenue next year — nearly double the $80 million SoundHound AI projects for 2024.

Profitability remains a big question mark

It looks like there’s a lot of growth on the horizon for SoundHound AI, both organically and through the recent acquisition. But the big question is how strong the bottom line will look. At this point, the company remains unprofitable and its losses have increased. In the most recent quarter, its net loss widened from $23.3 million in the year-ago period to more than $37.3 million. That’s a 60% increase in net loss, which is a faster rate than its revenue growth.

The company says the Amelia deal will result in cost synergies and result in “expanding profitability for years to come,” but isn’t actually saying if and when the company will emerge from the frenzy. Profitability is not the only thing that matters. Cash burn is of particular concern to SoundHound AI. If the company can’t generate positive cash flow, it may need to raise money through debt or in the equity markets — which leads to dilution and can send the stock into a tailspin.

In the first six months of the year, SoundHound AI consumed $40.4 million from its day-to-day operations, which is more than the $34.2 million it used in the same period last year. The company ended the quarter with just under $201 million in cash and cash equivalents, but that wouldn’t have been the case if it weren’t for the significant $237.6 million it raised through stock sales last year this.

Is SoundHound AI stock a good buy right now?

SoundHound AI is generating good top-line growth, but investors shouldn’t ignore bottom-line issues and cash burn. The enthusiasm surrounding AI stock has shown signs of slowing down, with its value down about 2% over the past three months. Even if the business continues to grow at a high rate without an improvement in cash flow or profitability, SoundHound is not demonstrating that it can expand its operations in a sustainable manner.

A high top-line growth rate is impressive, but that’s not reason enough to look past the company’s troubling fundamentals, as it has the potential to be a dilution machine. There are better and safer AI stocks to buy than SoundHound AI.