Summary
SoundHound AI reported solid Q4'22 numbers, but the company failed to deliver a dramatic increase in guidance.
The company is far more focused on operating efficiency due to limited cash when the generative AI excitement was supposed to provide explosive growth.
The stock still remains expensive at 10x '23 sales targets.
With the hype surrounding generative AI chat and SoundHound AI rallying to crazy heights in January, the company really needed to deliver a boosted 2023 guidance. The stock collapsed due to lackluster guidance and signs AI chat isn't meaningfully driving sales growth as the market hoped. My investment thesis is still Bearish on the stock, though the recent dip will quickly shift my view back to Neutral. $SoundHound AI Inc(SOUN)$
Source: Finviz
No Watershed Moment
SoundHound AI reported Q4'22 revenues of $9.5 million, up 84% YoY. The voice AI company was already producing impressive quarterly results long before ChatGPT unleashed generative AI chat on the world.
While the management team was much more positive on the conversational AI moment, the company didn't provide the type of guidance to suggest a watershed moment actually occurred. SoundHound AI CEO Keyvan Mohajer made the following statement on the Q4'22 earnings review:
Conversational AI is at a watershed moment and our proprietary Dynamic Interaction and Generative AI solutions are perfectly positioned. From electricity to telecommunications to internet search, each generation has established a new foundational capability to better serve society, and AI will catalyze this next horizon.
SoundHound AI ended the year with a cumulative bookings backlog of $332 million, up 59% YoY. The amount only grew $20 million sequentially and the YoY growth rate slowed dramatically from 239% in Q3'22.
Whatever the story, the conversational AI watershed moment hasn't impacted the SoundHound AI business one bit. If anything, the backlog appears to have quit growing at the same rate possibly due to potential customers pulling back on deals until fully understanding the ChatGPT opportunity.
If anything, SoundHound AI is now in a precarious position reporting substantial losses when the whole world is going crazy about voice AI. The company lost $30.7 million in the quarter and recently undertook a $60 million reduction in costs at a time business should be booming.
While the company told a great story on the earnings call, the business isn't taking a material step forward.
SoundHound AI generated Q4'22 revenues of $9.5 million for an annualized rate of $38.0 million, yet the company guided to 2023 revenues of only $43.0 to $50.0 million. With the massive $332 million order backlog and the hype in the voice AI segment, one would expect financial forecasts for something vastly above consensus analyst estimates of $46.0 million for the year.
The average analyst estimates has quarterly revenues only averaging $11.5 million for the year. Guidance doesn't suggest a watershed moment at all, especially considering guidance didn't even bump up 2023 targets above prior levels considering the calendar is already far into Q1.
Back To Reality
The stock has fallen all the way back to $2.20 after the disappointing quarter. With 200 million shares outstanding prior to the recent equity financing, the market cap is only $440 million now.
Based on guidance, SoundHound AI is getting back to a more reasonable valuation. The company has promising generative AI technology including the recently launched Dynamic Interaction, but the problem is the lack of revenues any signs of direct sales increases from this chat product.
At the start of 2023, the company announced a plan to reduce operating costs by $60 million in a further sign business isn't taking off. SoundHound AI only had an $19 million EBITDA loss in Q4 and further revenue growth would quickly cut those losses with gross margins up at 71%.
The problem is that quarterly revenues are only forecast to grow a few million dollars per quarter leading to very limited gross profit expansion in 2023. The company is cutting up to $15 million per quarter in operating expenses in order to reach profitability by the end of the year.
SoundHound AI should end the year in a much better financial position, but the moves to start the year reduce the extra growth catalysts to warrant a much higher stock price. The stock already trades at ~10x the updated sales targets for 2023.
Takeaway
The key investor takeaway is that SoundHound AI failed to deliver on expanding the business to warrant the rally in the stock. The AI hype hasn't led to any growth in the backlog and instead the company is focused on improving operating efficiency when the opportunity in generative AI appears explosive.
SoundHound AI investors should potentially look for a return to prior lows around $1 where the stock might an interesting play on AI hype again.
source: Seeking Alpha
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