SoundHound AI: Sniffing Out A Bubble

seekingalpha03-05

SummarySoundHound's stock has surged on the back of AI hype, particularly the potential implications of Nvidia's involvement in the company.SoundHound offers AI-enabled voice solutions to various ...

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Upswing118
03-05
Upswing118
soun just needs to make bigger noise to attract customers n investors!

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Given SoundHound's growth expectations for the next few years, I doubt the stock can continue to support this valuation.SoundHound's (NASDAQ:SOUN) stock has skyrocketed over the past month, on the back of AI hype. While the company's fundamentals look strong at the moment, investors appear to be more concerned with Nvidia's (NVDA) involvement than the underlying business. SoundHound's valuation is extreme, and given the nature of the business and the rapid innovation occurring at the moment, the risk-return trade off appears unfavorable. In the current environment, SoundHound's stock could continue to surge, but fundamentals will matter at some point.SoundHound’s BusinessSoundHound was founded in 2005, initially targeting music recognition, before leveraging its capabilities to expand into adjacent verticals. The company went public through a SPAC in 2022, with a focus on enabling conversational experiences using AI-enabled voice solutions.SoundHound claims best in class speed, accuracy and understanding in 25 languages, both in the cloud and on-device. It is targeting companies in markets like automotive, TV, and IoT, as well as offering customer service capabilities to a range of customers. The rapid improvement in LLMs over the past few years is a large tailwind for SoundHound at the moment, with generative AI now embedded in its products.While the rapidly advancing capabilities of LLMs has greatly benefited SoundHound's business in recent quarters, it has not all been smooth sailing. SoundHound terminated 10% of its staff in 2022 and enforced salary cuts, which may have been due to the fact that SoundHound reportedly raised less than originally expected in its SPAC merger deal. SoundHound secured 100 million USD additional funding in April 2023 and raised capital again in early 2024.SoundHound's Voice AI PlatformFigure 1: SoundHound's Voice AI Platform (source: SoundHound)SoundHound has stated that queries are a reasonable indicator of adoption of its technology. Queries started to surge in early 2018 and growth remains strong, with SoundHound recently stating it had reached a 3.5 billion query run rate.Monthly Houndify QueriesFigure 2: Monthly Houndify Queries (source: SoundHound)SoundHound has divided its business into three segments, which target different customers and have different monetization strategies.Pillar 1 - voice-enabled devices (primarily automotive customers)Pillar 2 - AI-enabled customer service (primarily restaurants)Pillar 3 - generating revenue opportunities for customers (advertising)SoundHound Business PillarsFigure 3: SoundHound Business Pillars (source: SoundHound)Pillar 1 is the most mature segment, but SoundHound expects future growth to be driven by Pillar 2 and Pillar 3.Expected Revenue Contribution by CategoryFigure 4: Expected Revenue Contribution by Category (source: SoundHound)Pillar 1The first pillar of SoundHound’s business is voice-enabled products across cars, TVs and IoT devices. SoundHound has over 20 automotive customers, with these brands representing in excess of 25% of the automotive industry. SoundHound's technology is also in TVs produced by companies like VIZIO. SoundHound has stated that it is trying to expand into areas like large appliance manufacturers, telcos, airplanes, robotics, printers, wearables, coffee machines and kiosks.Pillar 2Under pillar 2, SoundHound offers AI enabled customer service for businesses like restaurants. SoundHound’s technology is now being utilized in around 10,000 merchant locations, with another 100,000+ locations in its pipeline.Solutions include:Smart Ordering - uses voice AI to answer phone calls, take orders and answer questions.Employee Assist - a voice AI assistant for restaurant employees. It can provide support in areas like giving employees product information and guiding employees on how to prepare products.Dynamic Interaction - a voice interface for kiosks, drive-thrus, or any device with a screen.Smart Answering - a phone answering solution designed to be deployed outside of the restaurant industry.SoundHound Pillar 2 ProductsFigure 5: SoundHound Pillar 2 Products (source: SoundHound)In support of pillar 2, SoundHound recently acquired SYNQ3 for its AI customer service solutions. SYNQ3 adds customers across drive thru, fast casual, casual, and convenience stores to SoundHound’s customer base, including over 20 national and multinational chains. SoundHound is expected to pay a total consideration of 25 million USD over the next three years, predominately in stock. Integration of SYNQ3 is already underway, with SoundHound stating that it is already realizing synergies.Pillar 3SoundHound provides brands with new revenue opportunities through ecommerce, services and digital advertising. It hopes to collect fees for generating leads and facilitating transactions for customers. This is the least mature part of the business, but also has the most upside. I question whether SoundHound has the data and scale to compete in this area though.CustomersSoundHound has a growing roster of large corporations as customers, including Jersey Mike's, Krispy Kreme, White Castle, Church's Chicken, Merces-Benz, Hyundai, Kia, Honda, Snap, VIZIO, Sonic, Deutsche Telekom, Anki, Pandora and Harman.This covers a reasonably diverse range of use cases, including:Voice remote for TVsVoice orderingVoice interface for robotsVoice control of in room experience and concierge services at hotelsConversational interface for PandoraVoice interface for vehiclesNvidia InvestmentNvidia first invested in SoundHound in 2017 and has roughly a 10 million USD stake in the company, which in dollar terms is rather meaningless to Nvidia.Wedbush Securities provided interesting commentary on the investment:\"We view this as a positive indicator for the company as this investment now further solidifies the company's brand within the AI Revolution with the Godfather of AI Jensen [Huang] and NVDA now backing SOUN and we believe this could be the start of a broader investment into the company down the line which is a clear tailwind\" - Dan IvesViewed cynically, Nvidia’s investment in SoundHound could be considered an effort to manufacture demand. After receiving nominal investments from Nvidia, SoundHound’s share price skyrocketed, allowing the company to raise capital on favorable terms and accelerate growth investments.Nvidia also has a commercial relationship with SoundHound, which investors may view as more important due to the visibility and distribution footprint potentially provided by Nvidia. Q4 was the first quarter that SoundHound has realized licensing revenue from this relationship, but it is unclear how material this is at this stage.Nvidia's hardware is seeing adoption across broad swathes of the economy. The company appears to be trying to support the adoption of AI in as many areas as possible to help secure its future. I would not read too much into Nvidia's involvement in any individual company though.Voice OpportunitySoundHound believes that AI-driven customer service will be essential for every business in the future, and that voice will be the primary means of interacting with devices. As a result of these beliefs, and the capabilities of LLMs, SoundHound estimates that it has a 160 billion USD addressable market.Current hype in this area is supported by success cases like Klarna. Klarna's AI assistant was reportedly able to handle two thirds of customer queries in its first month, the equivalent of 700 full-time agents. Klarna estimates that this could lead to a 40 million USD cost saving in 2024.I believe the biggest uncertainty at this point is where value from these types of AI-enabled tools will accrue. SoundHound's market estimates seemingly implies that it will capture a large chunk of the value its technology creates. Klarna's numbers suggests that OpenAI is collecting pennies on the dollar for its technology though. It is also possible that benefits largely flow through to consumers in the form of price deflation. I believe it will be difficult for AI technology providers to maintain differentiation, and hence it seems unlikely that the majority of value will be captured by them.SoundHound's Addressable MarketFigure 6: SoundHound's Addressable Market (source: SoundHound)CompetitionSoundHound faces a range of competitors, many of which are technically strong and extremely well resourced, including:AppleAmazonGoogleMicrosoftNuanceCerenceGiven the rapidly advancing capabilities of AI specialists, it also seems likely that advanced voice capabilities will be offered by companies like OpenAI.SoundHound believes that:Big Tech solutions potentially present a competitive threat to their customers.Legacy solutions rely on outdated technology and are overly expensive.For the larger tech companies, voice AI is a small part of a larger strategy, which could be a positive or a negative for SoundHound. Voice AI may be given relatively little attention if it is not considered strategically important. It could also be offered below cost, or for free, to try and attract customers and lock them into the ecosystem.I would be cautious about assessing competition based solely on voice capabilities though, as we are probably not far away from a point where \"good enough\" voice capabilities will be widely available. Longer-term, attributes like data privacy, security, compliance and brand safety are likely to be more important differentiators.Financial AnalysisSoundHound generated 17 million USD revenue in the fourth quarter of 2023, up 80% YoY, driven by both new and existing customers. Automotive royalty growth was strong, due to a robust increase in units, offset by slightly lower ASP. Despite this, SoundHound believes that its new generative AI solutions have the potential to increase prices.SoundHound’s subscription and bookings backlog is now approximately 661 million USD. SoundHound also has a healthy waitlist of merchants due to robust demand. Subscription backlog is based on a number of assumptions around adoption percentages and ramp rates though and hence should probably not be given the same credence as the bookings backlog.SoundHound expects 63-77 million USD revenue in 2024, up approximately 52% at the midpoint. Roughly 100 million USD revenue is expected in 2025, a 43% increase YoY. SoundHound expects its Pillar 2 business to increase from less than 10% of revenue in 2023 to over 20% in 2024. These are strong growth expectations, particularly given the ongoing headwinds facing most growth businesses. SoundHound’s extreme valuation, and the once in a generation opportunity presented by generative AI, mean that these expectations are nowhere near high enough though. They also fall well short of the company's own expectations from just a few years earlier.SoundHound RevenueFigure 7: SoundHound Revenue (source: Created by author using data from SoundHound)SoundHound's margins have improved significantly in recent years due to a combination of higher gross profit margins and operating leverage. R&D expenses were 12.7 million USD in the fourth quarter, a decrease of 41% YoY, which was attributed to corporate restructuring actions. Sales and marketing expenses were 4.5 million USD in Q4, a decrease of 34% YoY.SoundHound expects to be adjusted EBITDA positive in 2025. Longer-term, the company expects its gross profit margins to remain in excess of 70%, and its EBIT margins to be over 30%. This seems reasonable based on the financial profile of companies like Cerence, but will ultimately be determined by competitive dynamics.SoundHound Operating ExpensesFigure 8: SoundHound Operating Expenses (source: Created by author using data from SoundHound)ValuationDespite only generating around 46 million USD revenue in 2023, SoundHound's market capitalization is roughly 1.9 billion USD. The company's EV/S multiple is around 40, which is extremely high. This type of multiple typically doesn't bode well for investors and is generally reserved for companies with:High visibility into future revenueSticky productsHigh marginsBarriers to entryExtremely high growthA large market that is underpenetrated and growing rapidlyWhile SoundHound ticks some of these boxes, the changes being wrought by AI make it almost impossible to know what will happen with this type of company more than a few years into the future.In terms of comparables, SoundHound also looks extremely expensive:Apple acquired Siri for around 200 million USD over a decade ago.Cerence has a 600 million USD market cap, despite generating far more revenue.Microsoft acquired Nuance in 2021 for almost 19 billion USD. This was near the height of the pandemic bubble though and Microsoft only paid a revenue multiple of around 14.SoundHound EV/S MultipleFigure 9: SoundHound EV/S Multiple (source: Seeking Alpha)ConclusionGenerative AI appears to be contributing to the growth of SoundHound's business at the moment. It should also be recognized that rapidly advancing AI capabilities make it difficult to predict the path of SoundHound's business with any confidence. Even if AI-enabled voice experiences become ubiquitous, the technology providers may capture little of the value they create.In addition, I am skeptical about voice as a universal interface for ambient computing. Language is often imprecise and, in some scenarios, will cause privacy concerns. In many cases, there will also likely be a tendency for interfaces to be integrated and multimodal, which may be problematic for a voice focused company.Even if investors are bullish on SoundHound's prospects, the company's valuation leaves no room for error. The slightest stumble or shift in investor sentiment will likely see the stock fall in excess of 50%. Given the risks involved, the potential returns seem far too low.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":281091155161096,"gmtCreate":1709650318175,"gmtModify":1709650322065,"author":{"id":"4087685930931350","authorId":"4087685930931350","name":"Upswing118","avatar":"https://static.tigerbbs.com/5ee810deeb4fd3c3d863b49cef1d9956","vip":1,"crmLevel":5,"crmLevelSwitch":1},"htmlText":"soun just needs to make bigger noise to attract customers n investors!","listText":"soun just needs to make bigger noise to attract customers n investors!","text":"soun just needs to make bigger noise to attract customers n investors!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/281091155161096","repostId":1121329417,"repostType":2,"repost":{"id":"1121329417","pubTimestamp":1709637224,"share":"https://www.laohu8.com/m/news/1121329417?lang=&edition=full","pubTime":"2024-03-05 19:13","market":"us","language":"en","title":"SoundHound AI: Sniffing Out A Bubble","url":"https://stock-news.laohu8.com/highlight/detail?id=1121329417","media":"seekingalpha","summary":"SummarySoundHound's stock has surged on the back of AI hype, particularly the potential implications of Nvidia's involvement in the company.SoundHound offers AI-enabled voice solutions to various indu","content":"<html><head></head><body><h2 id=\"id_1206761714\" style=\"text-align: left;\">Summary</h2><ul style=\"\"><li><p>SoundHound&#39;s stock has surged on the back of AI hype, particularly the potential implications of Nvidia&#39;s involvement in the company.</p></li><li><p>SoundHound offers AI-enabled voice solutions to various industries and has seen solid growth in its customer base and revenue.</p></li><li><p>The company&#39;s long-term competitive positioning is highly uncertain though, due to rapidly advancing AI capabilities.</p></li><li><p>SoundHound&#39;s valuation is extreme and leaves little room for error. Given SoundHound&#39;s growth expectations for the next few years, I doubt the stock can continue to support this valuation.</p></li></ul><p>SoundHound&#39;s (NASDAQ:SOUN) stock has skyrocketed over the past month, on the back of AI hype. While the company&#39;s fundamentals look strong at the moment, investors appear to be more concerned with Nvidia&#39;s (NVDA) involvement than the underlying business. SoundHound&#39;s valuation is extreme, and given the nature of the business and the rapid innovation occurring at the moment, the risk-return trade off appears unfavorable. In the current environment, SoundHound&#39;s stock could continue to surge, but fundamentals will matter at some point.</p><h2 id=\"id_2114030611\" style=\"text-align: left;\">SoundHound’s Business</h2><p style=\"text-align: left;\">SoundHound was founded in 2005, initially targeting music recognition, before leveraging its capabilities to expand into adjacent verticals. The company went public through a SPAC in 2022, with a focus on enabling conversational experiences using AI-enabled voice solutions.</p><p style=\"text-align: left;\">SoundHound claims best in class speed, accuracy and understanding in 25 languages, both in the cloud and on-device. It is targeting companies in markets like automotive, TV, and IoT, as well as offering customer service capabilities to a range of customers. The rapid improvement in LLMs over the past few years is a large tailwind for SoundHound at the moment, with generative AI now embedded in its products.</p><p style=\"text-align: left;\">While the rapidly advancing capabilities of LLMs has greatly benefited SoundHound&#39;s business in recent quarters, it has not all been smooth sailing. SoundHound terminated 10% of its staff in 2022 and enforced salary cuts, which may have been due to the fact that SoundHound reportedly raised less than originally expected in its SPAC merger deal. SoundHound secured 100 million USD additional funding in April 2023 and raised capital again in early 2024.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/916afc54c4451a9b1425351b405f1903\" alt=\"SoundHound&#39;s Voice AI Platform\" title=\"SoundHound&#39;s Voice AI Platform\" tg-width=\"640\" tg-height=\"272\"/><span>SoundHound&#39;s Voice AI Platform</span></p><p style=\"text-align: left;\"><strong>Figure 1: SoundHound&#39;s Voice AI Platform (source: SoundHound)</strong></p><p style=\"text-align: left;\">SoundHound has stated that queries are a reasonable indicator of adoption of its technology. Queries started to surge in early 2018 and growth remains strong, with SoundHound recently stating it had reached a 3.5 billion query run rate.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d3e544d52f11e5c5ab3c7050d6d5222b\" alt=\"Monthly Houndify Queries\" title=\"Monthly Houndify Queries\" tg-width=\"640\" tg-height=\"295\"/><span>Monthly Houndify Queries</span></p><p style=\"text-align: left;\"><strong>Figure 2: Monthly Houndify Queries (source: SoundHound)</strong></p><p style=\"text-align: left;\">SoundHound has divided its business into three segments, which target different customers and have different monetization strategies.</p><ul style=\"\"><li><p>Pillar 1 - voice-enabled devices (primarily automotive customers)</p></li><li><p>Pillar 2 - AI-enabled customer service (primarily restaurants)</p></li><li><p>Pillar 3 - generating revenue opportunities for customers (advertising)</p></li></ul><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/44bb445605e2188ebea358a61a34274a\" alt=\"SoundHound Business Pillars\" title=\"SoundHound Business Pillars\" tg-width=\"640\" tg-height=\"283\"/><span>SoundHound Business Pillars</span></p><p style=\"text-align: left;\"><strong>Figure 3: SoundHound Business Pillars (source: SoundHound)</strong></p><p style=\"text-align: left;\">Pillar 1 is the most mature segment, but SoundHound expects future growth to be driven by Pillar 2 and Pillar 3.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/6eb7c9b92bde041f6d68d6df7754be61\" alt=\"Expected Revenue Contribution by Category\" title=\"Expected Revenue Contribution by Category\" tg-width=\"640\" tg-height=\"549\"/><span>Expected Revenue Contribution by Category</span></p><p style=\"text-align: left;\"><strong>Figure 4: Expected Revenue Contribution by Category (source: SoundHound)</strong></p><h3 id=\"id_1332503276\" style=\"text-align: left;\">Pillar 1</h3><p style=\"text-align: left;\">The first pillar of SoundHound’s business is voice-enabled products across cars, TVs and IoT devices. SoundHound has over 20 automotive customers, with these brands representing in excess of 25% of the automotive industry. SoundHound&#39;s technology is also in TVs produced by companies like VIZIO. SoundHound has stated that it is trying to expand into areas like large appliance manufacturers, telcos, airplanes, robotics, printers, wearables, coffee machines and kiosks.</p><h3 id=\"id_522416220\" style=\"text-align: left;\">Pillar 2</h3><p style=\"text-align: left;\">Under pillar 2, SoundHound offers AI enabled customer service for businesses like restaurants. SoundHound’s technology is now being utilized in around 10,000 merchant locations, with another 100,000+ locations in its pipeline.</p><p style=\"text-align: left;\">Solutions include:</p><ul style=\"\"><li><p>Smart Ordering - uses voice AI to answer phone calls, take orders and answer questions.</p></li><li><p>Employee Assist - a voice AI assistant for restaurant employees. It can provide support in areas like giving employees product information and guiding employees on how to prepare products.</p></li><li><p>Dynamic Interaction - a voice interface for kiosks, drive-thrus, or any device with a screen.</p></li><li><p>Smart Answering - a phone answering solution designed to be deployed outside of the restaurant industry.</p></li></ul><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/4107e47f908d4db03d508b10b28404e1\" alt=\"SoundHound Pillar 2 Products\" title=\"SoundHound Pillar 2 Products\" tg-width=\"640\" tg-height=\"275\"/><span>SoundHound Pillar 2 Products</span></p><p style=\"text-align: left;\"><strong>Figure 5: SoundHound Pillar 2 Products (source: SoundHound)</strong></p><p style=\"text-align: left;\">In support of pillar 2, SoundHound recently acquired SYNQ3 for its AI customer service solutions. SYNQ3 adds customers across drive thru, fast casual, casual, and convenience stores to SoundHound’s customer base, including over 20 national and multinational chains. SoundHound is expected to pay a total consideration of 25 million USD over the next three years, predominately in stock. Integration of SYNQ3 is already underway, with SoundHound stating that it is already realizing synergies.</p><h3 id=\"id_1427373066\" style=\"text-align: left;\">Pillar 3</h3><p style=\"text-align: left;\">SoundHound provides brands with new revenue opportunities through ecommerce, services and digital advertising. It hopes to collect fees for generating leads and facilitating transactions for customers. This is the least mature part of the business, but also has the most upside. I question whether SoundHound has the data and scale to compete in this area though.</p><h3 id=\"id_263831691\" style=\"text-align: left;\">Customers</h3><p style=\"text-align: left;\">SoundHound has a growing roster of large corporations as customers, including Jersey Mike&#39;s, Krispy Kreme, White Castle, Church&#39;s Chicken, Merces-Benz, Hyundai, Kia, Honda, Snap, VIZIO, Sonic, Deutsche Telekom, Anki, Pandora and Harman.</p><p style=\"text-align: left;\">This covers a reasonably diverse range of use cases, including:</p><ul style=\"\"><li><p>Voice remote for TVs</p></li><li><p>Voice ordering</p></li><li><p>Voice interface for robots</p></li><li><p>Voice control of in room experience and concierge services at hotels</p></li><li><p>Conversational interface for Pandora</p></li><li><p>Voice interface for vehicles</p></li></ul><h2 id=\"id_4121867101\" style=\"text-align: left;\">Nvidia Investment</h2><p style=\"text-align: left;\">Nvidia first invested in SoundHound in 2017 and has roughly a 10 million USD stake in the company, which in dollar terms is rather meaningless to Nvidia.</p><p style=\"text-align: left;\">Wedbush Securities provided interesting commentary on the investment:</p><blockquote><p>&#34;We view this as a positive indicator for the company as this investment now further solidifies the company&#39;s brand within the AI Revolution with the Godfather of AI Jensen [Huang] and NVDA now backing SOUN and we believe this could be the start of a broader investment into the company down the line which is a clear tailwind&#34; - Dan Ives</p></blockquote><p style=\"text-align: left;\">Viewed cynically, Nvidia’s investment in SoundHound could be considered an effort to manufacture demand. After receiving nominal investments from Nvidia, SoundHound’s share price skyrocketed, allowing the company to raise capital on favorable terms and accelerate growth investments.</p><p style=\"text-align: left;\">Nvidia also has a commercial relationship with SoundHound, which investors may view as more important due to the visibility and distribution footprint potentially provided by Nvidia. Q4 was the first quarter that SoundHound has realized licensing revenue from this relationship, but it is unclear how material this is at this stage.</p><p style=\"text-align: left;\">Nvidia&#39;s hardware is seeing adoption across broad swathes of the economy. The company appears to be trying to support the adoption of AI in as many areas as possible to help secure its future. I would not read too much into Nvidia&#39;s involvement in any individual company though.</p><h2 id=\"id_1817455404\" style=\"text-align: left;\">Voice Opportunity</h2><p style=\"text-align: left;\">SoundHound believes that AI-driven customer service will be essential for every business in the future, and that voice will be the primary means of interacting with devices. As a result of these beliefs, and the capabilities of LLMs, SoundHound estimates that it has a 160 billion USD addressable market.</p><p style=\"text-align: left;\">Current hype in this area is supported by success cases like Klarna. Klarna&#39;s AI assistant was reportedly able to handle two thirds of customer queries in its first month, the equivalent of 700 full-time agents. Klarna estimates that this could lead to a 40 million USD cost saving in 2024.</p><p style=\"text-align: left;\">I believe the biggest uncertainty at this point is where value from these types of AI-enabled tools will accrue. SoundHound&#39;s market estimates seemingly implies that it will capture a large chunk of the value its technology creates. Klarna&#39;s numbers suggests that OpenAI is collecting pennies on the dollar for its technology though. It is also possible that benefits largely flow through to consumers in the form of price deflation. I believe it will be difficult for AI technology providers to maintain differentiation, and hence it seems unlikely that the majority of value will be captured by them.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/b52062023db55008c08b735cf1376602\" alt=\"SoundHound&#39;s Addressable Market\" title=\"SoundHound&#39;s Addressable Market\" tg-width=\"640\" tg-height=\"281\"/><span>SoundHound&#39;s Addressable Market</span></p><p style=\"text-align: left;\"><strong>Figure 6: SoundHound&#39;s Addressable Market (source: SoundHound)</strong></p><h2 id=\"id_1530759278\" style=\"text-align: left;\">Competition</h2><p style=\"text-align: left;\">SoundHound faces a range of competitors, many of which are technically strong and extremely well resourced, including:</p><ul style=\"\"><li><p>Apple</p></li><li><p>Amazon</p></li><li><p>Google</p></li><li><p>Microsoft</p></li><li><p>Nuance</p></li><li><p>Cerence</p></li></ul><p style=\"text-align: left;\">Given the rapidly advancing capabilities of AI specialists, it also seems likely that advanced voice capabilities will be offered by companies like OpenAI.</p><p style=\"text-align: left;\">SoundHound believes that:</p><ul style=\"\"><li><p>Big Tech solutions potentially present a competitive threat to their customers.</p></li><li><p>Legacy solutions rely on outdated technology and are overly expensive.</p></li></ul><p style=\"text-align: left;\">For the larger tech companies, voice AI is a small part of a larger strategy, which could be a positive or a negative for SoundHound. Voice AI may be given relatively little attention if it is not considered strategically important. It could also be offered below cost, or for free, to try and attract customers and lock them into the ecosystem.</p><p style=\"text-align: left;\">I would be cautious about assessing competition based solely on voice capabilities though, as we are probably not far away from a point where &#34;good enough&#34; voice capabilities will be widely available. Longer-term, attributes like data privacy, security, compliance and brand safety are likely to be more important differentiators.</p><h2 id=\"id_4049406200\" style=\"text-align: left;\">Financial Analysis</h2><p style=\"text-align: left;\">SoundHound generated 17 million USD revenue in the fourth quarter of 2023, up 80% YoY, driven by both new and existing customers. Automotive royalty growth was strong, due to a robust increase in units, offset by slightly lower ASP. Despite this, SoundHound believes that its new generative AI solutions have the potential to increase prices.</p><p style=\"text-align: left;\">SoundHound’s subscription and bookings backlog is now approximately 661 million USD. SoundHound also has a healthy waitlist of merchants due to robust demand. Subscription backlog is based on a number of assumptions around adoption percentages and ramp rates though and hence should probably not be given the same credence as the bookings backlog.</p><p style=\"text-align: left;\">SoundHound expects 63-77 million USD revenue in 2024, up approximately 52% at the midpoint. Roughly 100 million USD revenue is expected in 2025, a 43% increase YoY. SoundHound expects its Pillar 2 business to increase from less than 10% of revenue in 2023 to over 20% in 2024. These are strong growth expectations, particularly given the ongoing headwinds facing most growth businesses. SoundHound’s extreme valuation, and the once in a generation opportunity presented by generative AI, mean that these expectations are nowhere near high enough though. They also fall well short of the company&#39;s own expectations from just a few years earlier.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/0e6a68c5442b44ab12d139b3011b2a0e\" alt=\"SoundHound Revenue\" title=\"SoundHound Revenue\" tg-width=\"640\" tg-height=\"418\"/><span>SoundHound Revenue</span></p><p style=\"text-align: left;\"><strong>Figure 7: SoundHound Revenue (source: Created by author using data from SoundHound)</strong></p><p style=\"text-align: left;\">SoundHound&#39;s margins have improved significantly in recent years due to a combination of higher gross profit margins and operating leverage. R&amp;D expenses were 12.7 million USD in the fourth quarter, a decrease of 41% YoY, which was attributed to corporate restructuring actions. Sales and marketing expenses were 4.5 million USD in Q4, a decrease of 34% YoY.</p><p style=\"text-align: left;\">SoundHound expects to be adjusted EBITDA positive in 2025. Longer-term, the company expects its gross profit margins to remain in excess of 70%, and its EBIT margins to be over 30%. This seems reasonable based on the financial profile of companies like Cerence, but will ultimately be determined by competitive dynamics.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/9711e31c509c539c981400e07bf64c4e\" alt=\"SoundHound Operating Expenses\" title=\"SoundHound Operating Expenses\" tg-width=\"640\" tg-height=\"418\"/><span>SoundHound Operating Expenses</span></p><p style=\"text-align: left;\"><strong>Figure 8: SoundHound Operating Expenses (source: Created by author using data from SoundHound)</strong></p><h2 id=\"id_4237127340\" style=\"text-align: left;\">Valuation</h2><p style=\"text-align: left;\">Despite only generating around 46 million USD revenue in 2023, SoundHound&#39;s market capitalization is roughly 1.9 billion USD. The company&#39;s EV/S multiple is around 40, which is extremely high. This type of multiple typically doesn&#39;t bode well for investors and is generally reserved for companies with:</p><ul style=\"\"><li><p>High visibility into future revenue</p></li><li><p>Sticky products</p></li><li><p>High margins</p></li><li><p>Barriers to entry</p></li><li><p>Extremely high growth</p></li><li><p>A large market that is underpenetrated and growing rapidly</p></li></ul><p style=\"text-align: left;\">While SoundHound ticks some of these boxes, the changes being wrought by AI make it almost impossible to know what will happen with this type of company more than a few years into the future.</p><p style=\"text-align: left;\">In terms of comparables, SoundHound also looks extremely expensive:</p><ul style=\"\"><li><p>Apple acquired Siri for around 200 million USD over a decade ago.</p></li><li><p>Cerence has a 600 million USD market cap, despite generating far more revenue.</p></li><li><p>Microsoft acquired Nuance in 2021 for almost 19 billion USD. This was near the height of the pandemic bubble though and Microsoft only paid a revenue multiple of around 14.</p></li></ul><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/5d6aab25b3456eeae126428f8a9312e3\" alt=\"SoundHound EV/S Multiple\" title=\"SoundHound EV/S Multiple\" tg-width=\"640\" tg-height=\"203\"/><span>SoundHound EV/S Multiple</span></p><p style=\"text-align: left;\"><strong>Figure 9: SoundHound EV/S Multiple (source: Seeking Alpha)</strong></p><h2 id=\"id_2318935823\" style=\"text-align: left;\">Conclusion</h2><p style=\"text-align: left;\">Generative AI appears to be contributing to the growth of SoundHound&#39;s business at the moment. It should also be recognized that rapidly advancing AI capabilities make it difficult to predict the path of SoundHound&#39;s business with any confidence. Even if AI-enabled voice experiences become ubiquitous, the technology providers may capture little of the value they create.</p><p style=\"text-align: left;\">In addition, I am skeptical about voice as a universal interface for ambient computing. Language is often imprecise and, in some scenarios, will cause privacy concerns. In many cases, there will also likely be a tendency for interfaces to be integrated and multimodal, which may be problematic for a voice focused company.</p><p style=\"text-align: left;\">Even if investors are bullish on SoundHound&#39;s prospects, the company&#39;s valuation leaves no room for error. The slightest stumble or shift in investor sentiment will likely see the stock fall in excess of 50%. Given the risks involved, the potential returns seem far too low.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SoundHound AI: Sniffing Out A Bubble</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSoundHound AI: Sniffing Out A Bubble\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-05 19:13 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4675640-soundhound-ai-sniffing-out-a-bubble><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummarySoundHound's stock has surged on the back of AI hype, particularly the potential implications of Nvidia's involvement in the company.SoundHound offers AI-enabled voice solutions to various ...</p>\n\n<a href=\"https://seekingalpha.com/article/4675640-soundhound-ai-sniffing-out-a-bubble\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"SOUN":"SoundHound AI Inc"},"source_url":"https://seekingalpha.com/article/4675640-soundhound-ai-sniffing-out-a-bubble","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1121329417","content_text":"SummarySoundHound's stock has surged on the back of AI hype, particularly the potential implications of Nvidia's involvement in the company.SoundHound offers AI-enabled voice solutions to various industries and has seen solid growth in its customer base and revenue.The company's long-term competitive positioning is highly uncertain though, due to rapidly advancing AI capabilities.SoundHound's valuation is extreme and leaves little room for error. Given SoundHound's growth expectations for the next few years, I doubt the stock can continue to support this valuation.SoundHound's (NASDAQ:SOUN) stock has skyrocketed over the past month, on the back of AI hype. While the company's fundamentals look strong at the moment, investors appear to be more concerned with Nvidia's (NVDA) involvement than the underlying business. SoundHound's valuation is extreme, and given the nature of the business and the rapid innovation occurring at the moment, the risk-return trade off appears unfavorable. In the current environment, SoundHound's stock could continue to surge, but fundamentals will matter at some point.SoundHound’s BusinessSoundHound was founded in 2005, initially targeting music recognition, before leveraging its capabilities to expand into adjacent verticals. The company went public through a SPAC in 2022, with a focus on enabling conversational experiences using AI-enabled voice solutions.SoundHound claims best in class speed, accuracy and understanding in 25 languages, both in the cloud and on-device. It is targeting companies in markets like automotive, TV, and IoT, as well as offering customer service capabilities to a range of customers. The rapid improvement in LLMs over the past few years is a large tailwind for SoundHound at the moment, with generative AI now embedded in its products.While the rapidly advancing capabilities of LLMs has greatly benefited SoundHound's business in recent quarters, it has not all been smooth sailing. SoundHound terminated 10% of its staff in 2022 and enforced salary cuts, which may have been due to the fact that SoundHound reportedly raised less than originally expected in its SPAC merger deal. SoundHound secured 100 million USD additional funding in April 2023 and raised capital again in early 2024.SoundHound's Voice AI PlatformFigure 1: SoundHound's Voice AI Platform (source: SoundHound)SoundHound has stated that queries are a reasonable indicator of adoption of its technology. Queries started to surge in early 2018 and growth remains strong, with SoundHound recently stating it had reached a 3.5 billion query run rate.Monthly Houndify QueriesFigure 2: Monthly Houndify Queries (source: SoundHound)SoundHound has divided its business into three segments, which target different customers and have different monetization strategies.Pillar 1 - voice-enabled devices (primarily automotive customers)Pillar 2 - AI-enabled customer service (primarily restaurants)Pillar 3 - generating revenue opportunities for customers (advertising)SoundHound Business PillarsFigure 3: SoundHound Business Pillars (source: SoundHound)Pillar 1 is the most mature segment, but SoundHound expects future growth to be driven by Pillar 2 and Pillar 3.Expected Revenue Contribution by CategoryFigure 4: Expected Revenue Contribution by Category (source: SoundHound)Pillar 1The first pillar of SoundHound’s business is voice-enabled products across cars, TVs and IoT devices. SoundHound has over 20 automotive customers, with these brands representing in excess of 25% of the automotive industry. SoundHound's technology is also in TVs produced by companies like VIZIO. SoundHound has stated that it is trying to expand into areas like large appliance manufacturers, telcos, airplanes, robotics, printers, wearables, coffee machines and kiosks.Pillar 2Under pillar 2, SoundHound offers AI enabled customer service for businesses like restaurants. SoundHound’s technology is now being utilized in around 10,000 merchant locations, with another 100,000+ locations in its pipeline.Solutions include:Smart Ordering - uses voice AI to answer phone calls, take orders and answer questions.Employee Assist - a voice AI assistant for restaurant employees. It can provide support in areas like giving employees product information and guiding employees on how to prepare products.Dynamic Interaction - a voice interface for kiosks, drive-thrus, or any device with a screen.Smart Answering - a phone answering solution designed to be deployed outside of the restaurant industry.SoundHound Pillar 2 ProductsFigure 5: SoundHound Pillar 2 Products (source: SoundHound)In support of pillar 2, SoundHound recently acquired SYNQ3 for its AI customer service solutions. SYNQ3 adds customers across drive thru, fast casual, casual, and convenience stores to SoundHound’s customer base, including over 20 national and multinational chains. SoundHound is expected to pay a total consideration of 25 million USD over the next three years, predominately in stock. Integration of SYNQ3 is already underway, with SoundHound stating that it is already realizing synergies.Pillar 3SoundHound provides brands with new revenue opportunities through ecommerce, services and digital advertising. It hopes to collect fees for generating leads and facilitating transactions for customers. This is the least mature part of the business, but also has the most upside. I question whether SoundHound has the data and scale to compete in this area though.CustomersSoundHound has a growing roster of large corporations as customers, including Jersey Mike's, Krispy Kreme, White Castle, Church's Chicken, Merces-Benz, Hyundai, Kia, Honda, Snap, VIZIO, Sonic, Deutsche Telekom, Anki, Pandora and Harman.This covers a reasonably diverse range of use cases, including:Voice remote for TVsVoice orderingVoice interface for robotsVoice control of in room experience and concierge services at hotelsConversational interface for PandoraVoice interface for vehiclesNvidia InvestmentNvidia first invested in SoundHound in 2017 and has roughly a 10 million USD stake in the company, which in dollar terms is rather meaningless to Nvidia.Wedbush Securities provided interesting commentary on the investment:\"We view this as a positive indicator for the company as this investment now further solidifies the company's brand within the AI Revolution with the Godfather of AI Jensen [Huang] and NVDA now backing SOUN and we believe this could be the start of a broader investment into the company down the line which is a clear tailwind\" - Dan IvesViewed cynically, Nvidia’s investment in SoundHound could be considered an effort to manufacture demand. After receiving nominal investments from Nvidia, SoundHound’s share price skyrocketed, allowing the company to raise capital on favorable terms and accelerate growth investments.Nvidia also has a commercial relationship with SoundHound, which investors may view as more important due to the visibility and distribution footprint potentially provided by Nvidia. Q4 was the first quarter that SoundHound has realized licensing revenue from this relationship, but it is unclear how material this is at this stage.Nvidia's hardware is seeing adoption across broad swathes of the economy. The company appears to be trying to support the adoption of AI in as many areas as possible to help secure its future. I would not read too much into Nvidia's involvement in any individual company though.Voice OpportunitySoundHound believes that AI-driven customer service will be essential for every business in the future, and that voice will be the primary means of interacting with devices. As a result of these beliefs, and the capabilities of LLMs, SoundHound estimates that it has a 160 billion USD addressable market.Current hype in this area is supported by success cases like Klarna. Klarna's AI assistant was reportedly able to handle two thirds of customer queries in its first month, the equivalent of 700 full-time agents. Klarna estimates that this could lead to a 40 million USD cost saving in 2024.I believe the biggest uncertainty at this point is where value from these types of AI-enabled tools will accrue. SoundHound's market estimates seemingly implies that it will capture a large chunk of the value its technology creates. Klarna's numbers suggests that OpenAI is collecting pennies on the dollar for its technology though. It is also possible that benefits largely flow through to consumers in the form of price deflation. I believe it will be difficult for AI technology providers to maintain differentiation, and hence it seems unlikely that the majority of value will be captured by them.SoundHound's Addressable MarketFigure 6: SoundHound's Addressable Market (source: SoundHound)CompetitionSoundHound faces a range of competitors, many of which are technically strong and extremely well resourced, including:AppleAmazonGoogleMicrosoftNuanceCerenceGiven the rapidly advancing capabilities of AI specialists, it also seems likely that advanced voice capabilities will be offered by companies like OpenAI.SoundHound believes that:Big Tech solutions potentially present a competitive threat to their customers.Legacy solutions rely on outdated technology and are overly expensive.For the larger tech companies, voice AI is a small part of a larger strategy, which could be a positive or a negative for SoundHound. Voice AI may be given relatively little attention if it is not considered strategically important. It could also be offered below cost, or for free, to try and attract customers and lock them into the ecosystem.I would be cautious about assessing competition based solely on voice capabilities though, as we are probably not far away from a point where \"good enough\" voice capabilities will be widely available. Longer-term, attributes like data privacy, security, compliance and brand safety are likely to be more important differentiators.Financial AnalysisSoundHound generated 17 million USD revenue in the fourth quarter of 2023, up 80% YoY, driven by both new and existing customers. Automotive royalty growth was strong, due to a robust increase in units, offset by slightly lower ASP. Despite this, SoundHound believes that its new generative AI solutions have the potential to increase prices.SoundHound’s subscription and bookings backlog is now approximately 661 million USD. SoundHound also has a healthy waitlist of merchants due to robust demand. Subscription backlog is based on a number of assumptions around adoption percentages and ramp rates though and hence should probably not be given the same credence as the bookings backlog.SoundHound expects 63-77 million USD revenue in 2024, up approximately 52% at the midpoint. Roughly 100 million USD revenue is expected in 2025, a 43% increase YoY. SoundHound expects its Pillar 2 business to increase from less than 10% of revenue in 2023 to over 20% in 2024. These are strong growth expectations, particularly given the ongoing headwinds facing most growth businesses. SoundHound’s extreme valuation, and the once in a generation opportunity presented by generative AI, mean that these expectations are nowhere near high enough though. They also fall well short of the company's own expectations from just a few years earlier.SoundHound RevenueFigure 7: SoundHound Revenue (source: Created by author using data from SoundHound)SoundHound's margins have improved significantly in recent years due to a combination of higher gross profit margins and operating leverage. R&D expenses were 12.7 million USD in the fourth quarter, a decrease of 41% YoY, which was attributed to corporate restructuring actions. Sales and marketing expenses were 4.5 million USD in Q4, a decrease of 34% YoY.SoundHound expects to be adjusted EBITDA positive in 2025. Longer-term, the company expects its gross profit margins to remain in excess of 70%, and its EBIT margins to be over 30%. This seems reasonable based on the financial profile of companies like Cerence, but will ultimately be determined by competitive dynamics.SoundHound Operating ExpensesFigure 8: SoundHound Operating Expenses (source: Created by author using data from SoundHound)ValuationDespite only generating around 46 million USD revenue in 2023, SoundHound's market capitalization is roughly 1.9 billion USD. The company's EV/S multiple is around 40, which is extremely high. This type of multiple typically doesn't bode well for investors and is generally reserved for companies with:High visibility into future revenueSticky productsHigh marginsBarriers to entryExtremely high growthA large market that is underpenetrated and growing rapidlyWhile SoundHound ticks some of these boxes, the changes being wrought by AI make it almost impossible to know what will happen with this type of company more than a few years into the future.In terms of comparables, SoundHound also looks extremely expensive:Apple acquired Siri for around 200 million USD over a decade ago.Cerence has a 600 million USD market cap, despite generating far more revenue.Microsoft acquired Nuance in 2021 for almost 19 billion USD. This was near the height of the pandemic bubble though and Microsoft only paid a revenue multiple of around 14.SoundHound EV/S MultipleFigure 9: SoundHound EV/S Multiple (source: Seeking Alpha)ConclusionGenerative AI appears to be contributing to the growth of SoundHound's business at the moment. It should also be recognized that rapidly advancing AI capabilities make it difficult to predict the path of SoundHound's business with any confidence. Even if AI-enabled voice experiences become ubiquitous, the technology providers may capture little of the value they create.In addition, I am skeptical about voice as a universal interface for ambient computing. Language is often imprecise and, in some scenarios, will cause privacy concerns. In many cases, there will also likely be a tendency for interfaces to be integrated and multimodal, which may be problematic for a voice focused company.Even if investors are bullish on SoundHound's prospects, the company's valuation leaves no room for error. The slightest stumble or shift in investor sentiment will likely see the stock fall in excess of 50%. Given the risks involved, the potential returns seem far too low.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":10,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1121329417"}