Don't Buy SoundHound AI (SOUN) Until This Happens

SoundHound AI (NASDAQ: SOUN), a starring developer of audio and dependable designation tools, went nationalist done a merger with a peculiar intent acquisition institution (SPAC) astir 4 years ago. Its banal opened astatine $8.72 connected the archetypal day, but it present trades beneath $8.

That dismal show mightiness look astonishing comparative to its explosive maturation rates. From 2020 to 2024, its gross grew astatine a 60% CAGR. From 2024 to 2027, analysts expect its gross to summation astatine a 49% CAGR to $283 million, arsenic its adjusted net earlier interest, taxes, depreciation, and amortization (EBITDA) crook affirmative successful the last year.

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With an endeavor worth of $3.1 billion, SoundHound trades astatine 14 times its 2026 sales. It isn't a screaming bargain, but it besides isn't that costly compared to different hypergrowth stocks. However, investors shouldn't interaction SoundHound's banal until 1 cardinal metric improves.

Most of SoundHound's maturation comes from Houndify, its developer-oriented level for gathering customized AI-powered dependable designation apps. It's a fashionable enactment for companies -- including restaurants, automakers, and retailers -- that don't privation to stock their information with a tech elephantine similar Microsoft (NASDAQ: MSFT) oregon Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google.

After completing its SPAC merger, it acquired the AI edifice services supplier SYNQ3, the online nutrient ordering level Allset, the conversational AI institution Amelia, and the lawsuit work AI institution Interactions. Those acquisitions importantly accrued its vulnerability to the edifice manufacture and the booming marketplace for voice-enabled lawsuit work chatbots. That inorganic enlargement besides offset the slowing integrated maturation of its halfway business.

However, those acquisitions -- on with aggravated contention from larger tech companies -- reduced SoundHound's gross borderline from 69% successful 2022 to 49% successful 2024. That's a grim trajectory for an unprofitable institution expected to stay successful the reddish for the foreseeable future.

SoundHound's declining gross margins bespeak its precocious maturation rates aren't sustainable yet. It's trying to stabilize its gross margins by scaling its business, streamlining unreality costs crossed its acquired companies, replacing third-party bundle solutions with in-house solutions, and expanding the premix of higher-margin subscription and royalty-based revenues.