SoundHound AI, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

SoundHound AI, Inc. is a leader in conversational intelligence, offering an independent AI platform that enables businesses across industries to deliver high quality products, and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

SoundHound AI operates in a competitive landscape, particularly when you consider that big tech players are developing similar technologies. Its business relies on the stickiness of customer relationships and the strength of its technology, but this has not yet proven to be a robust moat. The company also has a history of losses and a weak balance sheet, making an aggressive moat rating unrealistic for the time being.

Business Explanation

SoundHound AI (SOUN) is a leading innovator in voice AI, providing an independent platform that enables businesses to build conversational interfaces into products and services. The company’s core offering is its proprietary Voice AI platform, which combines speech recognition, natural language understanding, and AI-driven learning. This platform is designed to be versatile across a variety of industries, such as restaurants, automotive, and entertainment. Key revenue streams include:

  • Product Royalties: Licensing its voice AI platform and its associated voice technology to various companies for integration into their respective offerings.

  • Subscription Services: Recurring revenue is collected from customers using platform solutions.

  • Advertising/Monetization: Revenue is generated by monetizing services and tools through promotions.

Trends in the Industry:

  • Growth in Voice AI: The industry is experiencing rapid growth due to increased demand for voice-enabled interfaces. Companies are seeking ways to add a more natural way to interact with their product and services and voice provides an ideal method.

  • Emergence of AI: AI technologies are rapidly evolving, becoming more commonplace in all industries. Companies are searching for AI solutions to enhance their overall capabilities.

  • Increased competition: Despite the high potential, this area is attracting attention from large tech companies and other startups, creating intense competition in the market.

Competitive Landscape:

  • SoundHound AI faces a competitive market, especially from established technology giants that have the resources and capital to compete effectively in the space. It also competes against other voice AI companies like Nuance Communications (now part of Microsoft), and startups.

  • What makes SoundHound different:

    • The company’s core strategy is to create a versatile, and independent AI platform that integrates its core technologies without dependence on a third-party system. This is a very important characteristic that allows many companies to choose SoundHound.
    • The company’s hybrid approach of using both cloud-based and on-device technologies allows for flexibility in implementation for customers.
    • SoundHound is looking to improve the customer experience, the company’s AI technology does a very good job in noisy situations. The company uses its natural language understanding (NLU) technology to improve user experience in complicated real-world environments.

Financials

Here’s a deep dive into the most recent financial statements. All numbers are in thousands.

Q3 2024 Results

  • Revenue: Total revenue for Q3 2024 was $13,998k which was an increase of 26% YoY.
    • Product royalties for the first nine months of 2023 was $29,672k. They also were $26,509k in the same period in 2022. This shows an increase of around 12%. However, product royalties have fallen in the latest quarter with a YOY decrease of 6%.
    • Subscriptions were $22,709k for the first nine months of 2023 compared to $9,411k. Subscription has increased massively for 141% YOY.
    • Advertising and other revenue was $3,441k for the first nine months of 2023 compared to $1,863k.

  • Operating Expenses: Total operating expenses in Q3 2024 were 52,459k, which is an increase of about 26% YOY.

    • Sales and marketing was the biggest operating expense at $21,661k for the first nine months of 2023. This is a massive increase compared to the $13,488k in the same period last year.
    • Research and development was $17,406k compared to $13,233k in 2022. R&D expenses have increased around 31%.
    • General and administrative expenses were $17,348k compared to $11,775k in 2022 for the first nine months. These expenses have increased around 47%.
  • Net Loss: The net loss was $34,448k for Q3 2024, compared to a loss of $22,661k in the same quarter last year. The net loss has increased by around 50%.

Balance Sheet Health Based on the latest report:

  • Cash and cash equivalents: $127.9 million. This amount has decreased since the previous quarter.
  • Total Liabilities: $450.5 million. A large portion of that was “deferred revenue” at 126.7 million and “convertible notes, net” at 137 million
  • Goodwill: $17.6 million
  • Total equity: $-205 million

The company’s balance sheet isn’t very healthy at the moment. They have almost no net assets, and with the amount of debt they are carrying, they have a lot of liabilities. While the growth is very high, the fact remains that the company has not managed to produce positive profits, and that they are not yet close to that.

Recent Concerns, Controversies, and Problems:

  • Losses: SoundHound AI continues to operate at a loss, and this loss has grown by more than 50% YoY in the latest quarter.
  • Competition: Even though the company is a leader in voice AI, the industry is becoming more competitive and bigger companies like Amazon and Google are creating their own solutions which could mean SoundHound loses out on its market position.
  • Heavy Spend: While the increase in sales of the company is very good, the company has spent a lot on research and development, and sales. As such, although the company has good revenue growth they are still not profitable. Investors will keep a close eye on whether the growth will lead to profitability in the future.
  • Negative Shareholder Equity: The equity of SOUN is substantially negative at -205 million. This means that the company will face problems if it is unable to continue securing new investment rounds.

Understandability

The business model is relatively easy to understand, offering its core Voice AI to other companies, as well as services and monetization avenues. However, the intricate details of the tech side, including the complex algorithms behind the voice AI technology makes the understandability more complicated. Overall, the business can be categorized as 3/5 on understandability.

Moat Rating

The moat is judged using the following attributes:

  • Intangible Assets: patents, brands, or regulatory licenses
  • Switching costs
  • Network economics
  • Cost advantages

Using the criteria mentioned above, SoundHound has some limited moats but not ones that will make the company a market leader or keep the competitive forces away.

1. Intangible Assets: SOUN has amassed many patents in a number of categories, they are around 125 patents. However, for many software companies, having a number of patents is not unique. Companies are always involved in patent battles. So, even though SOUN has a number of patents, they don’t represent a significant barrier. Also, the company also notes its “strong brand name.” While this may assist in customer retention, it does not constitute a wide economic moat.

2. Switching Costs: There are some switching costs associated with SOUN. The company integrates its AI software into a client’s system. Data that may have been gained from the use of prior versions of this system makes it slightly costly to switch, since information may be lost. However, this is not a difficult hurdle to overcome by new entrants.

3. Network Effects: SoundHound operates in a market where the network effect is very strong. Some have said that the more that SoundHound integrates into applications and technologies, the more useful it becomes, creating a self-sustaining flywheel of innovation and adoption. However, SOUN currently has not been able to fully leverage the power of a robust network effect and therefore does not really constitute a strong moat.

4. Cost Advantages: SOUN does not seem to have any specific cost advantages over its competitors.

In summary, while SoundHound AI possesses some elements of a moat like intangible assets, switching costs, and network effects, these are not strong enough to provide a wide moat. The company’s moat is weak at best (rated a 2/5), and they will require further development before a strong sustainable moat is generated.

Risks to Moat and Business Resilience

  • Technological Obsolescence: The core risk is that SoundHound AI’s voice technology could be replaced by new methods and approaches from competitors. As such, keeping up with technological changes is of utmost importance.
  • Intense Competition: The industry is very competitive, and with larger companies like Google entering, SOUN could be easily outcompeted and lose its market share.
  • Market Mispricing and Volatility: The stock market seems to be more and more dominated by institutional funds and algorithms, which could increase volatility. The company is yet to show consistent profits and has struggled to meet expectations in previous years, therefore it is not immune to volatility.
  • Limited Financial Stability: The company continues to generate losses and may need to find more capital. This dependence on external funding is not a sustainable situation, and future prospects are linked to whether the company can manage this.

Summary

SoundHound AI shows strong revenue growth in a market with tremendous potential, however, the company faces stiff competition, and a weak financial situation. It has limited moats. The company must work hard in order to avoid being replaced by competitors and to achieve profitability. The risk of this happening makes the company speculative and quite risky.