SoundHound AI (SOUN)

Voice AI recognition company SoundHound (NASDAQ:SOUN) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 151% year on year to $29.13 million. Its GAAP profit of $0.31 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded in 2005, SoundHound AI (NASDAQ:SOUN) develops independent voice artificial intelligence solutions that enable businesses across various industries to offer customized conversational experiences to consumers.

Their technologies are utilized in a variety of voice-enabled products and services, primarily in automotive, TV, IoT, restaurant, customer service, healthcare, finance, and retail industries.

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

Competitors in the voice AI and speech recognition sector include Microsoft Azure Speech Services (NASDAQ:MSFT), Alphabet’s Cloud Speech-to-Text (NASDAQ:GOOGL), and Apple Siri (NASDAQ:AAPL), and Verint Systems (NASDAQ:VRNT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, SoundHound AI grew its sales at an incredible 67.5% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers.

This quarter, SoundHound AI achieved a magnificent 151% year-on-year revenue growth rate, but its $29.13 million of revenue fell short of Wall Street’s lofty estimates.

Looking ahead, sell-side analysts expect revenue to grow 59.8% over the next 12 months, a deceleration versus the last three years. Still, this projection is admirable and indicates the market is forecasting success for its products and services.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

SoundHound AI is extremely efficient at acquiring new customers, and its CAC payback period checked in at 2.3 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give SoundHound AI more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like SoundHound AI, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

SoundHound AI’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 44.1% gross margin over the last year. That means SoundHound AI paid its providers a lot of money ($55.91 for every $100 in revenue) to run its business.

SoundHound AI produced a 36.5% gross profit margin in Q1, marking a 23.3 percentage point decrease from 59.7% in the same quarter last year. SoundHound AI’s full-year margin has also been trending down over the past 12 months, decreasing by 28.3 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Although SoundHound AI was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 181% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if SoundHound AI reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Looking at the trend in its profitability, SoundHound AI’s operating margin decreased by 39 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. SoundHound AI’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, SoundHound AI generated an operating profit margin of 440%, up 685.8 percentage points year on year. The increase was solid, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Looking ahead, Wall Street expects SoundHound AI to shrink its losses but remain unprofitable. Analysts are expecting the company’s trailing 12-month operating margin of negative 181% to rise to negative 41.2% in the coming year.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

SoundHound AI’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 104%, meaning it lit $104.49 of cash on fire for every $100 in revenue.

SoundHound AI burned through $19.35 million of cash in Q1, equivalent to a negative 66.4% margin. The company’s cash burn was similar to its $22.05 million of lost cash in the same quarter last year.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

SoundHound AI burned through $106.8 million of cash over the last year. Although the company has $4.63 million of debt on its balance sheet, we think its $245.8 million of cash gives it enough runway (we typically look for at least two years) to prioritize growth over profitability.

We were impressed by how significantly SoundHound AI blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed significantly. Overall, this was a weaker quarter. The stock traded down 3.8% to $9.36 immediately after reporting.

Updated: May 16, 2025 at 11:52 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

SoundHound AI’s business quality ultimately falls short of our standards. Although its revenue growth was exceptional over the last three years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows it’s becoming less efficient at building and selling its software. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its operating margins reveal poor profitability compared to other software companies.

SoundHound AI’s price-to-sales ratio based on the next 12 months is 29.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $11.79 on the company (compared to the current share price of $10.73).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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