Where Will SoundHound AI Stock Be in 5 Years?

So far, generative artificial intelligence (AI) has mainly rewarded investors who bet on the pick-and-shovel side of the opportunity. This category includes chipmakers, data centers, and cloud computing companies that provide the infrastructure needed to make the technology possible.

That said, generative AI has compelling use cases in our everyday lives. And SoundHound AI (NASDAQ: SOUN) aims to make a name for itself by pioneering voice-enabled AI software for consumer-facing applications. Let's dig deeper to see if this specialized niche is the foundation for a good investment over the next five years and beyond.

Why SoundHound AI

Speech recognition technology has been around for a long time. We are all familiar with Apple's original Siri voice assistant, which launched in 2010, or those automatic speech recognition (ASR) customer service bots that converted natural speech to text so that machines could process it. Generative AI has replaced these limited systems with large language models (LLMs) trained on libraries of relevant data.

Voice AI is one of the lowest-hanging fruits in the entire AI software industry because it is just improving upon a proven technology that has already been in use for years. And while many companies are working on some form of this software, SoundHound started catching the market's attention in early 2024 after chip giant Nvidia disclosed a $3.7 million ownership stake (Nvidia exited the position later that year).

Aside from the hype, SoundHound is also generating enough growth to deserve a closer look. In the third quarter, revenue jumped 68% year over year to $42 million as the company expanded its voice AI offerings across many different industries. While SoundHound cut its teeth with early deployments to restaurant drive-thrus, it has quickly become a serious player in the automotive sector, boasting partnerships with mainstream giants like Stellantis, Mercedes, and Hyundai.

Cars are a natural fit for voice AI systems because it is safer for drivers to control vehicle functions hands-free. Being mobile also naturally synergizes with the ability of these systems to provide the user with recommendations, like nearby restaurants or entertainment options.

An acquisition-driven growth strategy?

While SoundHound's growth is impressive, it isn't necessarily organic. Management has been on somewhat of an acquisition binge, scooping up new start-ups that it believes will help them create a dominant voice-AI ecosystem. Most recently, this involved the $60 million buyout of AI customer service and workflow start-up Interactions. This deal follows the $80 million buyout of enterprise AI company Amelia in 2024 and the purchase of restaurant ordering platform Allset in 2023.

Naturally, these acquisitions quickly boosted SoundHound's diversification by giving it fully onboarded clients in a wide variety of industries. They are also helping the company drive top-line growth. But while acquisitions can look like a magic bullet, the whole picture is more complicated. Research from Fortune magazine suggests 70% to 75% of mergers fail to deliver value to investors because of factors like overpayment and operationally weak acquisition targets.

Image source: Getty Images.

And while SoundHound's strategy is delivering top-line growth, this isn't helping the bottom line yet. Third-quarter operating losses expanded from $33.8 million to $114.9 million. And the cash burn may worsen as management continues to pursue its aggressive expansion strategy.

With roughly $269 million worth of cash and equivalents on its balance sheet, SoundHound will quickly start running out of liquidity if it doesn't raise capital from outside sources, such as equity dilution, which involves creating and selling new units of stock. This can be a bad thing for existing investors because it dilutes their ownership of the company.

Is SoundHound stock a buy?

Over the next five years, expect voice AI technology to continue improving, which could dramatically expand SoundHound's addressable market. That said, it is still too early to tell if the company has established a strong economic moat against competition. Furthermore, its acquisition-driven growth strategy could backfire if the new business additions continue causing operating losses to grow. Investors should sit on the sidelines until more information becomes available.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.