This AI Darling Doubled Revenue, So Why Aren’t Profits Showing Up?

SoundHound AI has been one of the market’s more surprising winners in the AI boom. The conversational AI technology has found its way into restaurants, cars, healthcare systems, and even financial institutions.

Over the past year, the stock has soared nearly 3x as revenue growth has consistently blown past expectations.

But revenue growth alone doesn’t pay the bills and while analysts loves a good growth story, SoundHound is still struggling with the same nagging issue that trips up many fast-scaling tech companies, profitability.

Key Points

• SoundHound’s sales jumped over 3x year-over-year in Q2.

• Despite the growth, losses widened, cash burn hit north of $110 million over the past year.

• Shares trade at an expensive 43x sales, far above peers like C3.ai.

Sales Momentum That’s Hard to Ignore

Sales rocketed higher thanks to a surge in restaurant adoption, with both new clients and contract renewals drove growth. And there was a big win in China, where a major automaker chose SoundHound to power voice features in vehicles sold globally.

Add to those a new partnership with one of the world’s largest healthcare players, an industry where AI adoption has only just begun and renewals and upsells with four of the top 10 global banks, cementing SoundHound as a player in financial services.

That translated into revenue up 3x year-over-year, and prompted management to raise full-year guidance to as much as $173 million. If that number holds, SoundHound will more than double sales in just 12 months, a remarkable feat.

For context, few companies in enterprise software scale this quickly once they pass $100 million in annual revenue.

The Profitability Puzzle

The trouble is that none of this growth has yet translated into sustainable profits. On a GAAP basis, SoundHound lost $0.19 per share in Q2.

The bigger problem is cash flow where the company burned through $25 million in the quarter, adding up to negative $112 million over the past year. That’s not a rounding error but it’s nearly two-thirds of current annual revenue.

Margins are slipping too. Gross margin fell to 58.4% in Q2. That might seem minor, but in software, gross margin is the lifeblood of future profitability.

The Valuation Test

Investors often look past losses when growth is explosive. But at some point, valuation has to come into the conversation. SoundHound currently trades at an eye-popping price-to-sales ratio north of 40x.

So, should you buy? If you’re a high-risk, high-reward investor, you might view SoundHound as a bet on conversational AI becoming as ubiquitous as smartphones. The company has undeniable momentum and a growing roster of blue-chip clients.

But if you’re looking for disciplined financial performance, this stock raises red flags. Until SoundHound can rein in losses, stabilize margins, and prove it can scale profitably, the valuation looks more like speculation than investment.