By this level, the potential of generative synthetic intelligence has led to a dramatic value improve for a lot of AI shares. A type of shares, SoundHound AI (Nasdaq: SOUN), has seen its inventory run virtually 400% YTD. This occurred after Nvidia (Nasdaq: NVDA) disclosed that it owned shares in SoundHound. Many traders is likely to be tempted to purchase SOUN inventory simply because Nvidia did. However, you shouldn’t let your self fall into this lure.

 

On this article, I’ll break down why you must keep away from SOUN inventory in the meanwhile.

What’s SoundHound AI?

SoundHound AI is a frontrunner in voice AI conversational applied sciences. It gives full options and particular person parts that assist firms create distinctive voice assistants. It’s voice assistants are primarily utilized by automotive and quick meals firms. SoundHound went public in 2022 in the course of the peak of the SPAC-craze. Since then, SOUN inventory is down a complete of 41%. 

SoundHound’s Final 3 Quarters

The very first thing I at all times do when analyzing a inventory is look at its monetary statements. This instantly tells you if the corporate is worthwhile or not. Listed here are SoundHound’s final 3 quarters:

 

December 2023

September 2023

June 2023

 

SOUN inventory would possibly look rosy solely trying on the share will increase in income. This snapshot makes it seem to be SoundHound’s income is rising handsomely every quarter. However, income development doesn’t matter as a lot when the corporate is constantly posting hefty losses.

 

SoundHound has by no means come near turning a revenue (at the least not anytime just lately). Once you have a look at the previous couple of years, the outlook solely will get worse. Over the previous 5 years, SoundHound has routinely misplaced greater than twice as a lot cash because it makes.

 

These losses is likely to be OK if SoundHound was in “startup mode.” In different phrases, investing all a refund into the corporate and rising rapidly. However, SoundHound was based in 2005. So, it needs to be nicely out of startup mode by now.

 

As if these losses weren’t dangerous sufficient, Capybara Analysis recenty printed a scathing quick report on SoundHound AI.

A Scathing Brief Report by Capybara Analysis

This report is a part of the rationale why SOUN inventory has misplaced 50% off its all-time excessive. I learn the total report (which was fairly lengthy as that they had loads of unfavorable issues to say) and pulled out a few of the highlights:

 

Manipulating monetary statements: Capybara alleges that SoundHound manipulates its monetary statements to look extra worthwhile than they’re. For instance, the corporate has been recognized to tug ahead income for merchandise that they haven’t even began engaged on but. They’ve additionally handled one-time cancellation charges (paid by shoppers) as “product income” to assist enhance their margins. 

 

Dropping main shoppers: In 2022, SoundHound was very boastful of its high shoppers in its 10k submitting. However, in 2023, SoundHound didn’t point out any shoppers by title. This suggests that the corporate most likely misplaced its high shoppers. Not an excellent signal.

 

 

Points submitting constant updates: SoundHound has typically filed its accounting paperwork late and continuously revises them after the actual fact. In 2023, it additionally used the auditor Armanino LLP to edit its books. This is identical auditor that FTX used. Not good firm to maintain. 

 

 

 

Capybara’s report provided quite a bit to absorb. However, that is additionally simply the evaluation of only one quick vendor. Brief sellers are improper on a regular basis. So, we even have to think about that Nvidia, one of many world’s main AI firms, additionally invested in SoundHound.

However What About Nvidia?

I wasn’t capable of dig up a complete lot of additional info on Nvidia’s funding. All I might discover was that Nvidia’s 13F assertion (launched on Feb. 14) disclosed a stake of 1.73 million shares.

 

However, I’d prefer to level out that Nvidia is price over $2 trillion and earned income of $61 billion in 2024. So, for a corporation of Nvidia’s measurement, a small stake in SoundHound is nearly a rounding error. You’d even be stunned by the shortage of due diligence that always goes into offers like this. For instance, simply have a look at the startup, Theranos. 

 

Theranos was a biotech startup firm based by Elizabeth Holmes. It grew to a valuation of 9 billion earlier than traders realized that the corporate’s product (a house blood testing package) didn’t work. Elizabeth was capable of elevate cash early on by tricking early traders after faking a product demo. Then, she was capable of elevate further funds as a result of later traders simply assumed that another person had accomplished the due diligence. It’s a captivating story and there’s an important documentary of it on Hulu, known as The Dropout.

 

Now, I’m not saying that Nvidia did no due diligence on SoundHound. However, there’s an opportunity that they only positioned a handful of bets on firms working within the AI house, with out doing a lot due diligence. In any case, if the funding doesn’t work out then it received’t harm Nvidia in any respect. Nvidia would possibly’ve additionally had a strategic cause to spend money on SoundHound, like having access to its tech.

 

Both method, the underside line is that you simply shouldn’t purchase SoundHound simply because Nvidia did.

SoundHound’s Damaged Enterprise Mannequin

Even when we put the accounting sketchiness to the facet, there’s yet one more obvious challenge with SoundHound: it has a damaged enterprise mannequin.

 

SoundHound makes most of its cash (which isn’t a lot) from voice assistants. So, first off, it already has to compete with Google Voice (Nasdaq: GOOGL) and Amazon Alexa (Nasdaq: AMZN). Robust competitors. However, even when we assume that SoundHound has a superior product, the voice assistant house is notoriously unprofitable. 

 

Though the tech works amazingly, Amazon has described its Alexa product as a “colossal failure.” Amazon reported that Alexa misplaced as much as $10 billion in some years. Actually, the The whole lot Retailer just lately introduced large layoffs in its Alexa division. So, if Amazon isn’t making any cash in voice assistants then I can’t think about that SoundHound is.

 

Ought to You Purchase SOUN Inventory?

I wouldn’t. Even when Capybara’s quick report is improper in some areas, it’s a easy proven fact that SoundHound has been dropping cash for over a decade. Plus, there’s the truth that voice assistants are broadly unprofitable. When you think about that SoundHound additionally probably makes use of sketchy accounting practices, SOUN inventory simply isn’t definitely worth the threat.

 

Happily, there are many different AI firms on the market which can be rather more thrilling.

 

Disclaimer: This text is for common informational and academic functions solely. It shouldn’t be construed as monetary recommendation because the creator, Ted Stavetski, just isn’t a monetary advisor.