Where Will SoundHound Be in 1 Year?

Key Points

• Revenue soared 217% in Q2, spurring management to increase guidance for 2025.

• The company is burning through cash, and its gross margins are falling.

• There's no indication yet that the company will significantly narrow its losses over the next year.

• 10 stocks we like better than SoundHound AI ›

SoundHound AI (NASDAQ: SOUN) quickly became a top AI stock over the past several years, as the company's conversational AI platform has been adopted by restaurants, automakers, healthcare leaders, and more. SoundHound's ability to attract new customers and rapidly increase its revenue has helped push its share price up nearly 200% over the past year.

But the company isn't without its issues. Profitability remains elusive; the company's gross margins have ticked downward over the past year, and its valuation is sky-high. That has left many investors wondering where SoundHound might be over the coming year and whether the stock is a buy right now. Here's what I think could happen with the company over the next year.

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Image source: Getty Images.

1. More customer growth and sales momentum

SoundHound has a knack for attracting new customers and expanding its revenue, and the company continued these trends in Q2. Here are just a few of the wins SoundHound had in the quarter:

• Had a "breakthrough quarter" for new customers and renewals in its restaurant segment.
• Won a major OEM automotive customer in China, which sells vehicles domestically and worldwide.
• Added "one of the world's largest healthcare companies" to its customer list.
• Has seven of the top 10 global financial institutions as customers, upselling and renewing to four of them in the quarter.

The result of its strong customer growth, renewal, and upselling was that revenue jumped 217% to $42.7 million, and management raised its 2025 revenue guidance to $173 million, up from previous guidance of $167 million, both at the midpoint.

SoundHound's revenue growth has been very impressive over the past several years. Take a look at the past two years and guidance for the current year:

Source: SoundHound filings. Calculations by author.

If SoundHound achieves its full-year revenue guidance for 2025, it will have more than doubled its sales over the past year. And with its impressive Q2 results, the company is well on its way to achieving its goal.

2. Profitability could still be an issue

If there's one thing that's troubling about SoundHound, it's the fact that, despite its impressive sales growth, the company still isn't profitable.

On a generally accepted accounting principles (GAAP) basis, SoundHound lost $0.19 per share in Q2, widening its loss from $0.11 per share in the year-ago quarter. On an adjusted (non-GAAP) basis, the loss narrows to $0.03 per share, but no matter how you slice it, the company is losing money.

What's more, SoundHound is burning through cash while its gross margins are slipping. The company's negative free cash flow was about $25 million in Q2, and is at about negative $112 million over the past 12 months. Meanwhile, gross margins dropped to 58.4% in Q2 from 66.5% a year earlier -- a sign the company is finding it increasingly difficult to translate sales growth into profitability.

As of now, there's little evidence that SoundHound is making significant strides toward profitability. That should concern investors, because its impressive sales growth ought to make profitability easier. What's more, with a price-to-sales (P/S) ratio of 43, SoundHound AI's stock is already expensive. For context, the software AI stock C3.ai trades at just 6 times sales, while fellow conversational AI company Cerence trades at 1.8.

So, is SoundHound stock a buy?

Some investors may have a higher appetite for risk and care less about profitability than I do, but I don't believe SoundHound is a buy right now. If the company can reduce losses, slow spending, and improve gross margins, there could be a case for buying it -- but at present, it doesn't appear to be moving in that direction. With a price-to-sales ratio of 43, investors are paying a steep premium for a company that still faces profitability concerns.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai and Cerence. The Motley Fool has a disclosure policy.