Is SoundHound AI a Millionaire-Maker Stock?

Key Points

• Voice AI technology presents a clear long-term opportunity.

• Can SoundHound's acquisition-driven business model generate sustainable returns for shareholders?

• 10 stocks we like better than SoundHound AI ›

A few months ago, I thought artificial intelligence (AI) was a hype-driven fluke; now I use it almost every day. The technology behind text-based large language models (LLMs) like ChatGPT is already taking the world by storm, and audio-focused functionality is the obvious next step in its evolution.

With shares up 93% over the last 12 months, investors are clearly optimistic about SoundHound AI's (NASDAQ: SOUN) ability to pioneer this opportunity. But is the company all it's cracked up to be? Let's dig deeper to find out if SoundHound actually has millionaire-maker potential.

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The case for voice AI

Speech and audio recognition tech has been around for years. But SoundHound aims to help transform it from the clunky interactive voice response systems commonly used in call centers into an experience capable of matching or even exceeding a real human. The company's software has enjoyed early success in the restaurant industry.

SoundHound's internal research suggests its Dynamic Drive-Thru platform can complete orders 10% faster than a human because of instant response times and order entry. While that time savings may look small on its own, it can add up to an additional $185,600 in annual revenue without even considering potential savings on labor costs and other productivity gains (robots don't call in sick, for example).

SoundHound is also pursuing use cases in enterprise customer service and automotive assistants. And it boasts a partnership with European auto giant Stellantis, which is rolling out the tech in its DS line of vehicles.

Can SoundHound create shareholder value?

Voice-enabled AI will undoubtedly become a big opportunity in the coming years. But that doesn't necessarily mean SoundHound will create sustainable shareholder value. While the company's first-quarter earnings look amazing on the surface, the reality is quite complicated.

While revenue rose 151% year over year to $29.1 million, and net income jumped 494% to $129.9 million, this growth was far from organic. The company completed a series of significant acquisitions last year, including the $80 million buyout of enterprise AI company Amelia, expected to add $45 million to 2025 revenue. The large deals obscure the real performance of SoundHound's core voice AI business, and this level of growth seen this quarter probably won't be replicated in future quarters.

Image source: Getty Images.

Furthermore, SoundHound's first-quarter profit is also unlikely to be replicated because it is due to a whopping $176 million change in the fair value of contingent acquisition liabilities related to money it no longer owes as part of the recent acquisition deals. This write-down is good news for the company, but it's not a sign of sustainable profitability.

SoundHound's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 44% year over year to a loss of $22.2 million. And that strong negative trend likely represents a clearer picture of the company's actual operating performance right now.

Is SoundHound a millionaire-maker stock?

With its market cap of just $4.4 billion, SoundHound is a tiny company targeting a vast opportunity in voice-enabled AI. And that means it definitely has millionaire-maker potential. That said, investors should make sure they are betting on fundamentals instead of hype.

SoundHound's growth looks far too reliant on acquisitions. And this is usually not a good strategy, with a study from Fortune magazine finding that 70% to 75% of acquisitions fail to meet their intended goals and create shareholder value. SoundHound may prove to be an exception. But investors should wait for more quarters of data to see how the new, combined business performs before considering a position in the stock.

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Will Ebiefung 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.