Generative AI (GenAI) infrastructure is the hottest market out there right now. But after the clouds are full, who will make it rain? SoundHound AI (NASDAQ:SOUN) stock promises to do that. It’s a voice company tied to GenAI. SoundHound products can understand human speech, process requests through a Large Language Model (LLM) and respond with a computer-generated voice.
This has made SOUN stock hot. It’s up 183% in just the last three months. The market cap is $1.8 billion on 2023 sales of just $46 million.
Is this rise justified? Yes and no.
Why SoundHound
First, SoundHound is growing like a weed. Sales were $17.1 million in the last quarter, but that was up 80% over a year earlier. Its gross margin on those sales was 75%, but the company reported a net loss of 40 cents/share as it worked to feed the growth.
SoundHound has established itself in two niches.
Buying SYNQ3 in December made it the leader in the restaurant voice niche.
Restaurants can use SoundHound at kiosks or over the phone to take orders and reservations. This means they can handle the lunch rush without adding staff. They can funnel reservations to a central point and know where a chain’s tables will be available.
At the time of the acquisition SYNQ3 had 100,000 restaurants in the pipeline and 10,000 partnerships.
The second niche is cars, where SoundHound can deliver ChatGPT services without a network connection. Its service, called Iris, is already going into Stellantis (NASDAQ:STLA) cars using Nvidia (NASDAQ:NVDA) Drive. That means your car will be able to answer questions, in 17 languages, both about the car and the world around it, by accessing maps.
SoundHound has barely scratched the GenAI voice market niche. Hospitals, governments, retailers, anything that can face a rush of calls, could now handle them. All kinds of consumer products, like TVs, can use it. Nvidia builds AI infrastructure, but as CEO Keyvan Mohajer notes, SoundHound puts it to use. The company estimates the value of its niche at $100 billion.
Limits to Growth
SoundHound’s fat valuation makes it prone to downdrafts when investors shed risk.
The stock has already experienced two just in March. Insider selling, including by CEO Mohajer, has helped the bear case.
SoundHound also faces a host of competitors in voice AI, including technology from Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). GenAI voice embedded in an operating system could cut SoundHound off at the knees, say the bears.
SoundHound is sidestepping the competition by limiting itself to point solutions, embedding its technology in Nvidia chips. The car technology, for instance, does not need any server connection to work. The SoundHound solution is hardware and software, built into the car.
But any stock can overshoot. SoundHound is no exception. Almost half the SoundHound shares traded off the exchange are now being shorted. Bears call its valuation stretched. Embedding software in hardware, building point technologies, may limit long-term growth, the bears say.
The Bottom Line
The bears have a point. Because of its approach to the market, SoundHound will be a niche player in the GenAI sweepstakes.
This lets it grab a lot of the market’s low-hanging fruit. Voice interfaces tied to proprietary databases can be set up to deliver profits quickly.
But this is a limited market. Think of the CD player in your old car, or the speaker outside your favorite fast food joint. Point solutions have a limited lifespan.
The big bucks in AI will come from cloud applications that update centrally, and continuously, that don’t become obsolete. SOUN stock won’t be competing with Microsoft for this market. That’s great in the short run. In the long run, your upside is limited.
As of this writing, Dana Blankenhorn had LONG positions in NVDA, MSFT and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.