SoundHound AI (SOUN) Cash Burn Rate Concern For Profitability Reach

SoundHound is anticipated to show a rise in its quarterly revenue with 49.5% increase in revenue to $13.083 million from $8.75 million compared to same period a year ago.

Earning per share is expected to come in at 9 cents. If we looked at the recent two quarters, SOUN has missed the EPS forecast, but with the AI demand growing, how have SoundHound managed to capture this wave?

But we need to look closely as the share price increase is not due to SOUN improvement in its operations or performance. More importantly, their financials is a concern, especially on the cash burn, resulting in negative cash flow.

One important point we need to understand that SOUN is a relatively small player when we looked at the AI companies and sector. Their key technology , AI voice platform can supposedly transform the order-taking process at drive-thrus and be integrated into vehicles. But have this technology helped SOUN to show that they can be sustainable in the long term.

Compared to other AI businesses, the sales from SOUN was just under $11.6 million in the first three months of 2024, while this might represent a 73% revenue growth, but this figure is modest.

Not forgetting their net loss was nearly 3 times the size of its top line, totaling more than $33 million. Operating cash burn for the period also totaled $21.9 million, which was an increase from $14.5 million in the same period last year.

If we looked closely on the cash flow, the capital expenditure has increased in Q1 2024 compared to Q4 2023, while SoundHound AI might have $117.1 million in cash and cash equivalents as of the end of the period, but how long can this last? What is the runway for the cash burn?

So investors would be evaluating whether if it is worth taking a risk on this stock and will be looking to see if SoundHound AI can continue to grow their business with increasing their losses.

Based on 5 Wall Street analysts offering 12 month price targets for SoundHound AI, Inc Class A in the last 3 months. The average price target is $7.50 with a high forecast of $9.50 and a low forecast of $5.00. The average price target represents a 74.42% change from the last price of $4.30.

With the concern over cash burn, as their expenditure have been increasing, so is this current price on the high side?

Until SoundHound AI can show us that they have managed to reduce their expenditure while their sales top lines continue to grow, I would think SOUN might stay trading around the $4 to $4.50

Founded in 2005 and going public through a special purpose acquisition company (SPAC) merger in 2022, SoundHound AI was in the right place at the right time to capitalize on AI-related hype. Before going public, it developed several audio-technology products, including in-car music and speech recognition software. Now, it can combine these platforms with large language models (LLMs) to create more value for consumers.

SoundHound AI revenue in Q1 2024 jumped by 73% YoY to $11.6 million, but SOUN is still unprofitable because their operating loss record $28.5 for Q1. The company currently spends more than its quarterly revenue on research and development ($14.9 million). While this outflow delays near-term profitability, it could help set the company up for future success.

So if we were to look at how SOUN has spend money on R&D, the question is when will the ROI come back? If we are looking for SOUN for long term, we need to wait for few more quarter for SOUN to turn profitable.

If we looked at how SOUN have been trading over the past few weeks, market is showing concerns on its earnings, especially the cash burn and also ROI, as seen in some big tech companies like META.

There is potential downside coming from MACD showing that this might prolong, and from the KDJ, we are also not seeing any potential attempt to reverse to the upside.

So i would continue to monitor how SOUN is trading today (08 Aug) especially market has experienced sell off yesterday (07 Aug).

I am not expecting SOUN to show earning surprise but what would be in focus for me, is their cash flow, whether the run way for cash burn could be sustained.

SOUN could be continued to invest in R&D, but I think they need to strike a balance with the sales and revenue against the expenses.

Appreciate if you could share your thoughts in the comment section whether you think SOUN would be posting a narrow losses with better sales due to AI demand?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.