After Posting 68% Revenue Growth in Q3, Is SoundHound AI Proving to Be an Underrated Buy?

Voice artificial intelligence (AI) company SoundHound AI (NASDAQ: SOUN) hasn't been doing well this year despite its focus on the red-hot opportunities within AI. Entering trading this week, the stock has fallen around 40%, which may be surprising given how well many other AI stocks have done.

However, after posting impressive growth in its most recent quarter, it may attract more attention from growth investors. With a market capitalization of around $5 billion, this AI stock may appear to be loaded with potential, especially if its growth remains strong.

Is SoundHound AI an underrated stock to own right now? Let's take a closer look.

Image source: Getty Images.

Revenue rises, but expenses explode

SoundHound's revenue came in at just over $42 million for the period ending Sept. 30, which was an incredibly impressive 68% improvement from the prior-year period when its revenue was $25.1 million. Through acquisitions, the company has diversified its operations to include more industries and sectors, and that has enabled it to significantly grow its top line. A particularly notable acquisition was its purchase of Amelia last year, an AI company with contracts in multiple sectors, including finance, insurance, retail, and healthcare.

However, it hasn't led to stronger earnings overall. The company's net loss for the quarter totaled a whopping $109.3 million, which was more than five times the $21.8 million it reported in the same period a year ago. The company's high cost structure and a significant increase in the fair value of contingent liabilities more than offset the impressive increase in sales.

By diversifying its operations, the company's gross margins have also worsened. Last quarter, SoundHound's gross profit margin was 42.6% versus 48.6% a year ago. A decline in margins can make it more difficult for the company to turn a profit, and it's something investors should watch out for in future earnings reports.

SoundHound's cash burn remains high

Often, when it comes to growth stocks, the statement of cash flow is more useful for investors. Its focus on cash flow can provide investors with a more meaningful picture of how a company is doing and whether its operations are sustainable.

Over the past nine months, SoundHound has spent $76.3 million on its day-to-day operating activities, which is slightly higher than the $75.8 million it spent during the same period last year. Cash flow can fluctuate, but this is not a good sign for SoundHound. Despite its strong revenue growth, the company doesn't appear to be getting any closer to generating positive cash flow from its operations.

While its cash and cash equivalents balance of 268.9 million suggests that it shouldn't run out of resources anytime soon, more stock offerings and dilution could be on the horizon for SoundHound investors. The stock has already been a fairly dilutive investment to own in recent years. That can put downward pressure on the stock price, resulting in worse returns for investors.

SOUN Shares Outstanding data by YCharts.

SoundHound's growth is impressive, but it comes with an asterisk

The company says the main reason for the revenue growth this past quarter was primarily due to acquisitions. That can give investors a misleading picture of just how well it is doing organically, which is a much more reliable way to gauge growth.

Investors should tread carefully with SoundHound, as its headline numbers may appear impressive, but they don't tell the whole story. Until the company can show that it can grow organically and also improve its cash flow and overall earnings, I'd avoid the stock, as it's likely to remain a volatile investment.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.