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The Sound of Risk: Delving into the Pros and Cons of Investing in SoundHound AI Stock

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With a Midas touch that seems to turn everything to gold, Nvidia has been dominating the artificial intelligence (AI) landscape, making investors salivate over the next big opportunity in the market.

As a heavyweight in providing computer chips and software for AI tools, Nvidia has soared to one of the largest market capitalizations globally, currently standing at $2.2 billion. The stock has surged a staggering 500% since the onset of 2023.

So when news broke about Nvidiaโ€™s invested interest in SoundHound AI (NASDAQ: SOUN) through a strategic product partnership, it was no surprise to see SoundHound AIโ€™s stock price skyrocket. The burning question now is, should investors jump on the bandwagon and add some SoundHound AI shares to their portfolio?

The Tale of SoundHound AI

SoundHound AI, as its name suggests, specializes in voice AI services, particularly in offering automated voice technology solutions to businesses. Boasting support for multiple languages and top-tier accuracy, the company has secured pivotal partnerships with automotive giants and major restaurant chains.

With collaborations extending to renowned brands like Honda and White Castle, SoundHound AI aims to integrate voice technology into products to enhance customer experience and streamline operational processes, such as order-taking in fast-food establishments.

In a recent development, SoundHound AI and Nvidia announced a partnership to provide on-chip AI leveraging Nvidiaโ€™s product ecosystem. This innovative alliance enables users to access SoundHoundโ€™s voice technology offline, focusing primarily on automotive systems where both companies wield substantial influence.

Rapid Growth, Yet Profits Remain Elusive

SoundHound AIโ€™s growth trajectory has been nothing short of impressive, with full-year revenue soaring by 47% in 2023 to $45.9 million, and a remarkable spike of 80% year-over-year growth in Q4.

The company continues to announce major partnerships, including collaborations with a prominent automotive manufacturer to integrate its technology until 2037, ventures with Jersey Mikeโ€™s, and the acquisition of SYNQ3 (yes, thatโ€™s actually the companyโ€™s name) to bolster its suite of restaurant products.

However, despite the upward revenue trend, SoundHound AI remains deeply in the red. With an alarming operating margin of -139% over the last 12 months and a substantial $70 million free cash flow burn in 2023, the company, with less than $100 million in cash reserves, faces a pressing need to either attain profitability swiftly or secure additional funding. The road to financial viability seems long and arduous for SoundHound AI.

SOUN PS Ratio Chart

SOUN PS Ratio data by YCharts

Seeking Greener Pastures for Investment

While the allure of voice AI technology is enticing, investors must bear in mind that this sector experienced a surge of hype a few years back without substantial product adoption.

Recall the buzz surrounding Appleโ€™s Siri, Amazonโ€™s Alexa, and Alphabetโ€™s Google voice assistant. Despite the colossal investments made by tech giants in developing voice technology, the sector has largely failed to meet expectations.

Given the formidable competition from tech behemoths like Amazon, Google, and Alphabet with their robust research budgets and unparalleled distribution networks, itโ€™s questionable whether SoundHound AI, a comparatively smaller player, can emerge victorious in this arena.

Furthermore, concerns loom over SoundHound AIโ€™s valuation. Currently trading at a lofty price-to-sales ratio (P/S) of 26, approximately 10 times the S&P 500 average, the company appears to be significantly overvalued. Hence, investors are advised to exercise caution and abstain from purchasing SoundHound AI stock at this juncture.

Is SoundHound AI the Right Investment for You?

Before diving into SoundHound AI stock, itโ€™s imperative to consider an essential factor:

The analysts at Motley Fool Stock Advisor recently unveiled their top 10 stock picks that they believe hold tremendous potential for investors. Surprisingly, SoundHound AI did not make the cut. These ten selected stocks are projected to deliver substantial returns in the years ahead.

By subscribing to Stock Advisor, investors gain access to a user-friendly roadmap for investment success, comprising portfolio-building guidance, regular analyst updates, and bi-monthly stock recommendations. Since 2002, Stock Advisor has outperformed the S&P 500 by a striking margin*.

Explore the 10 recommended stocks

*Stock Advisor returns as of April 4, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Foolโ€™s board of directors. Brett Schafer holds positions in Amazon. The Motley Fool maintains positions in and endorses Amazon, Apple, and Nvidia. The Motley Fool upholds a disclosure policy.

The opinions and views expressed herein belong to the author and do not necessarily align with those of Nasdaq, Inc.

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