SoundHound - AI for voice systems

Doing some research into any new stock ideas that could match the investment ideas of Sauldom, I came up with SoundHound. I am posting this for feedback on how my analysis stands up, and feedback on how to better tune what I need to look at going forward.

Yep, SoundHound started as that phone app that could recognize music in public and then tell you what song it was. I had that app on my phones for some time in the early 2010’s.

It has evolved into what looks like an AI powered, voice recognition powerhouse because of that history. They have all the data from all their years processing sound queries. Ala Tesla’s inhouse data, they have the same thing related to voice commands across their product lines. To me, they appear to be the best situated to deal with interactive response AI just based on the data and the history of their niche.

Starting the obvious negatives, that probably stop most from investing, we have a company that just started trading on the NASDAQ in April '22. They have income measured in the $milion$ and a total market cap of $550 mil as I write this. There are some customer concentration risks, they call out that some auto companies are over 10% of revenue. Lastly, they are still losing money to the tune of -$20 mil on revenue of $13 mil.

But, they do seem to be actively addressing all those things. It is just that they are relatively new to their growth and it is going to take time for them to balance all the things. Here are my notes.

Corporate losses - They started a restructuring effort in Q1 of this year to address the high losses and reduce overall operating expenses. As of 3rd Q they have increased revenue while dropping losses by 35% in one year. This looks like a great trend that I will keep an eye on.

Corporate revenue - Their revenue is tiny compared to other stocks we own, and it is very lumpy. However, they are predicting more growth for 4th Q and they expect to be break even by next year. (I couldn’t find specifics, just noted they said it in call transcripts.)

Corporate margins - This is where the stock popped up in my searches, they have margins over 70% for all the years I could find. Their revenue growth was big, but they are also just starting out so it is easy to get growth percentages to look good. They did drop off this quarter by a lot, 56% - 42% - 19%. The super low 19% is a YOY comparison, and it seems that Q3 '22 was a big year due to some contract revenue recognition, so it’s not like the business just failed in past quarter, they had tough comps due to being small enough that one contract impacted the numbers a lot.

Customers - (Automotive) They show over 20 different automobile manufactures as customers, across the globe, so they are pretty imbedded in that market. (Customer Service) They have just (my assumption from call notes) pushing into the restaurant and customer service world with AI voice interaction. They have specific restaurants they are trialing with (White Castle, Jersey Mikes, Krispy Kreme) but they are also working with a hardware partner for POS stations that means exposure to Toast, Square, Oracle customers using point of sale devices. (IOT Devices) They are also the voice response system for many household devices like TV’s (Visio), OEMs like Qualcomm and Motorola, and services like Pandora.

Does this outline look interesting to anyone else? It is AI, it is a newishly traded company that has been around for a while, it appears to be landing customers quickly, and I feel like the TAM here could be very big. As small as they are now, a buyout is HIGHLY likely in my experience, but I’d still call that a win. To me, this is NOT a story stock as they are executing, and they have actually added products. They are unique with their own datasets, just like some of the others we praise on the board.

What have I missed that needs to be considered? Let me know how to be more critical of these kinds of companies.

Lastly, here is my spreadsheet.

Customer count
1-'22 2-'22 3-'22 4-'22 1-'23 2-'23 3-'23
automotive >20
restaurant >3
IOT/other
ARR – YOY
4-'21 1-'22 2-'22 3-'22 4-'22 1-'23 2-'23 3-'23
$10,000.00 $25,000.00
Revenue - $Thous
4-'21 1-'22 2-'22 3-'22 4-'22 1-'23 2-'23 3-'23
$5,151.00 $4,290.00 $6,152.00 $11,186.00 $9,501.00 $6,707.00 $8,751.00 $13,268.00
-$21,847.00 -$25,103.00 -$30,668.00 -$30,061.00 -$30,680.00 -$26,369.00 -$21,932.00 -$20,197.00
Revenue Growth – YOY
4-'21 1-'22 2-'22 3-'22 4-'22 1-'23 2-'23 3-'23
15.00% 43.00% 178.00% 84.00% 56.00% 42.00% 19.00%
Gross Margins
4-'21 1-'22 2-'22 3-'22 4-'22 1-'23 2-'23 3-'23
77.00% 71.00% 71.00% 79.00% 73.00%
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Two extra notes that I wanted to call out here.

Why is this not a story stock? They are already executing and rolling services out to customers. They are also innovating and they have already completed “phase 1” of a new solution for AI voice recognition:

I’m pleased to say we’ve completed the first phase of this project and successfully built a multilingual model that can handle queries in multiple languages interchangeably and respond with high accuracy with streaming audio in real time. We will be rolling out the first version of Polaris to our customers in the coming weeks. This is an important milestone, and we expect even more disruptive features in future phases of Polaris. We are excited about the potential applications of a model that can respond instantly and seamlessly and in different modalities to request in various languages across a huge range of potential queries. The commercial possibilities are clearly huge.

Another bit of kudos to track is that the company is ranked in the top 10 machine learning by Technology Magazine in a market that is set at $2 trillion TAM by 2030.

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@dlbuffy, Hmm, I have SoundHound on my phone. It wasn’t free. I don’t recall exactly what I paid for it, maybe $2.00. Anyway, I bought it because the main (or maybe only) function it provided was the ability to provide a song title, artist name, etc. just by listening to it for a few seconds.

Later I installed Shazam. It does the same thing, only better (it will recognize songs that Sound Hound doesn’t recognize). And Shazam is a free app.

If you look at SoundHound in the Google Play Store you will see that it has recently garnered a lot of one and two star ratings (it used to get a lot of five stars). The main complaint is that it now fails to recognize a lot of songs. Users aren’t happy. Personally, I wouldn’t know as I’ve not used the app for years. I exclusively use Shazam for song recognition.

I’m not sure how that plays into the narrative you’ve just posted. You mentioned its origin as a song recognition app, but didn’t elaborate. Looks as if they’re changing direction, but if so they’ve done a terrible job of informing their current customer base. Maybe that isn’t relevant?

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TMF is not super excited by this stock:
SoundHound AI Is Singing a More Pleasant Tune, but Does That Mean Investors Should Buy the Stock? | The Motley Fool

Debt, and share dilution are biggies here.

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@brittlerock, it seems from dlbuffy’s post that the app was how they started but is not core to their future. They are aiming to sell sound AI capabilities B2B, which is of no interest to app consumers, so I wouldn’t expect them to have some proactive communication about it. The deterioration of the app’s quality may reflect that change of focus. I doubt it harms their brand with these B2B conversations.

@dlbuffy my big concern would be what is their moat? Yeah they have a large library of real-world audio clips, but how far will that take them? Probably the most direct application would be in very noisy environments, which is unlike the situation in a car (though would be useful in restaurants). Moreover, the most important aspect of the use case is likely not to be the voice recognition itself, but the intelligence to do the right thing in response. At both ends of that interaction, you have giants like MSFT, GOOG, AMZN, AAPL who have spent many years developing voice assistants, delivering advanced tech B2B, or both. I have a hard time seeing SOUN providing compelling value as a point solution, especially as state-of-the-art AI becomes more and more expensive and best accessed through major providers like MSFT or GOOG.

I feel this is reflected in their low revenue. They really have not attracted many customers. Most are in auto, which is 1) the environment I think they have the lowest advantage from their 1P data, 2) relatively small in terms of the number of customers they might eventually get, and 3) perhaps very suited to displacement by larger technology partners who can handle the full range of the auto makers’ needs. How many of these customers are really taking a bet on SOUN tech vs just satisfying one need in their systems in a way that could be swapped out at any time?

And one more negative take on the revenue. In 2022 they grew revenue 50%. Based on Q4 guidance, they are set to roughly grow 50% again. If they continue growing at 50% for three more years, they will finally eclipse their current operating expenses. If they don’t have a serious growth inflection (story stock) or dial their expenses way back (very unlikely), this isn’t a sustainable business at any kind of attractive profit margin. At the end of 2022 they were down to less than $10M in cash and equivalents, and in the early months of 2023 took on $25M in preferred equity financing and $100M in debt financing. This is the source of their dilution, and also why they are now tracking toward over $20M in annual interest expenses – nearly half their revenue on interest alone. It seems some of this expense may be in share issuance in lieu of cash interest, but whether it’s dilution or cash out the door, it feels like desperation. They’re back up near $100M in cash on the balance sheet now, but it just keeps burning…

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One of the things they continue to point out is that their solution can be branded to the company licensing the product. This means that a Kia doesn’t have to pay Siri licensing premium or same with saying…with google assistant. I like their attempt to differentiate, but I agree there are many 400lb gorillas in this fight.

Yep, that is a huge red flag. I am taking some comfort from the moves they are making to reduce expenses. If this continues in right direction (already three Q’s of progress) then I think this is too much looking in rear view mirror.

Again, I agree, good point and things have to keep going in correct direction for this to be addressed. The dilution is my highest concern just because I have been burned in those situations before. But, I also see the flip side which is that companies need to spend money to grow, and as long as they get financials under control I am willing to wait a bit for profitability.

This is literally a minuscule position at moment to keep it on my radar. I have less than $1000 invested at this time. Actually, I have less invested here than I do in crypto…LOL.

Good feedback. Thanks

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Totally forgot that I had already posted on this stock. I have not added to my tiny position at all, but today has a HUGE rise pre-market. Up 75% at this point, so I did a bit of digging.
It seems a other “AI” companies are posting filings that show they have taken an ownership interest in the company.

From a news brief -

“3-F filing from Nvidia in which the company disclosed a 1.73 million share stake in SoundHound”

Not sure how this is worth the huge jump in price today. I have them listed as reporting earnings first week of March. So going to be some time between this news and anything substantial.

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This is leading the financial news on Yahoo right now. When NVIDIA takes a stake in something, it’s a feeding frenzy.

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Nvidia did not take or start a stake - it’s just the first time they had to file a 13F because their ARM holdings put them over the $100m threshold - the stake in SoundHound is from 2017, since which Nvidia has not done any buying or selling (and why would you, $3.7m is miniscule for a trillion dollar company)

This is a nothing burger

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