SoundHound AI: A Barking Mad Proposition?

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SoundHound AI (SOUN 3.00%), a purveyor of audio and voice recognition – essentially, teaching machines to understand when you’ve had enough1 – emerged from the mists of a SPAC merger some four years ago. It opened at a respectable 8.72 crowns2, but now trades for less than that, a situation that suggests either a profound misunderstanding of the market or, more likely, a very good reason.

Its revenue growth, one must admit, is… enthusiastic. A 60% Compound Annual Growth Rate (CAGR) from 2020 to 2024. Analysts predict a continuation of this upward trajectory, albeit at a slightly more sedate 49% CAGR through 2027, bringing total revenue to a projected 283 million. They also optimistically anticipate adjusted EBITDA turning positive in the final year, which is a bit like expecting a goblin to pay its taxes – technically possible, but don’t hold your breath.

With an enterprise value of 3.1 billion, SoundHound currently trades at 14 times its 2026 sales. Not a screaming bargain, no. Nor, thankfully, is it priced as if it holds the secret to eternal youth. However, before anyone considers adding it to their portfolio, one key metric requires a significant improvement. Think of it as the dragon’s hoard – impressive to look at, but useless if it’s all pyrite.

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A Keen Ear for Gross Margins

Much of SoundHound’s growth stems from Houndify, a platform allowing developers to build custom AI-powered voice apps. It’s popular with companies – restaurants, automakers, retailers – who prefer not to share their data with the usual tech behemoths, like Microsoft (MSFT 2.85%) or Alphabet’s (GOOG 0.34%) (GOOGL 0.40%) Google. The rationale is simple: trust, like a well-maintained golem, is hard to build and easily broken.

Following its emergence from the SPAC process, SoundHound embarked on a series of acquisitions. SYNQ3, an AI restaurant services provider; Allset, an online food ordering platform; Amelia, a conversational AI company; and Interactions, a customer service AI firm. This expansion broadened its reach into the restaurant industry and the burgeoning market for voice-enabled customer service chatbots. It also, conveniently, masked the slowing organic growth of its core business. It’s a bit like a magician distracting you with one hand while picking your pocket with the other.

However, these acquisitions, coupled with intense competition, have taken a toll on SoundHound’s gross margin, which has fallen from a respectable 69% in 2022 to a rather concerning 49% in 2024. For a company currently operating at a loss, and expected to remain so for the foreseeable future, this is… suboptimal. It’s akin to building a magnificent castle on a foundation of quicksand.

The Quest for Margin Expansion

SoundHound’s declining gross margins suggest its current growth rates aren’t entirely sustainable. The company is attempting to stabilize things by scaling its business, streamlining cloud costs across its acquired entities, replacing third-party software with in-house solutions, and increasing the proportion of higher-margin subscription and royalty-based revenue. A noble endeavor, to be sure, but one fraught with peril.

Simultaneously, however, it’s increasing headcount, ramping up data center spending, and even contemplating further acquisitions. In other words, don’t expect those gross margins to improve anytime soon. And until they do, the stock isn’t worth a copper piece. It’s a bit like trying to fill a bottomless pit with gold – a fascinating exercise in futility.

1

Or when you’ve simply mispronounced a crucial command. The nuances of human speech are, it turns out, remarkably difficult for machines to grasp.

2

The official currency of sensible investment decisions. Exchange rates may vary.

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2026-02-23 20:17