SaaS growth is strong in SoundHound AI shares, but customer focus is risky (SOUN)

We’ve previously covered SoundHound AI, Inc. (Nasdaq:SON) in March 2024, to discuss the then-sudden rise in its stock price, thanks to Nvidia’s (NVDA) stake revelations and growing demand for voice AI. technology With the big language model integrated as a proprietary SaaS in both cloud-native and hardware-embedded platforms.

However, as the company remains unprofitable due to a deteriorating balance sheet and significant shorting of the stock, we believed there could be near-term volatility, which led to our Hold (Neutral) rating at the time.

Since then, SOUN has actually declined significantly -52% since its peak in March 2024, a significant underperformance of the broader market. However, we’re not sure whether it would be wise to recommend a buy here, with the stock continuing to trade at a notable premium compared to its AI SaaS peers.

Coupled with the emerging start-up phase, the tendency to dilute shares, and Given the impact on profit margins in Q1 2024 from the latest acquisition, we think it may be prudent to wait and monitor its implementation for a little longer.

SOUN continues to report strong growth in SaaS

SOUN revenue segment

Currently, SOUN reported double-digit earnings for Q1 2024 on May 09, 2024, with revenues of $11.59 million (-32.4% QoQ/ +72.9% YoY) and EPS of -$0.07 ( On a quarterly basis / +46.1% on an annual basis)

Much of the tailwind was attributable to the significantly accelerated growth in the Hosted Services segment to $8.9 million (+58.6% QoQ/+87.7% YoY), driven by revenue recognition from either per-use and/or fixed-fee subscriptions, Further highlighting how powerful its AI SaaS audio platform is.

However, despite the strong growth at SOUN’s top line, readers should also note that gross profit margins are less than 65.5% (-11.5 points QoQ/-6.8 YoY), along with EBIT margins. Consumption is at -132% (-111 points). Quarterly / -90 years) in the last quarter.

Much of the headwind on the bottom line was attributable to its lower-margin call center agent business, thanks to the recently completed acquisition of SYNQ3 Restaurant Solutions.

Even, so we believe things may improve in the medium term, given the cumulative impact on SOUN’s automated voice AI technology solutions and diversification into the restaurant (including customer service/drive-thru) and fitness businesses.

This builds on the SaaS company’s existing presence in automotive, streaming and communications platforms across TVs, smart devices and IoT devices.

That’s why SOUN reported a stellar expansion in cumulative subscriptions and multi-year backlog bookings to $682 million (+3.1% QoQ/+80% YoY) in Q4, providing insights into its top/bottom line over the long term. the long .

This comes in addition to fiscal 2024 revenue guidance that was raised moderately from the original midpoint of $70 million (+52.5% YoY) to $71 million (+54.6% YoY).

Unfortunately, this is where the good news ends.

SOUN’s high client concentration poses a risk to its future prospects – readers should monitor

Upon closer inspection, it is clear that two core clients (marked as A and C) account for 48% of SOUN’s F1 2024 revenue (+12 points y/y), with high client concentration carrying high risks if Non-renewal of the contract in light of intense market competition and/or reduction of the margin in the case of preferential contract prices.

While the recent capital raise of $137 million contributed to an improved balance sheet with cash/equivalents of $211.74 million (+122.2% QoQ/+357% YoY), this naturally increased the number of Shares to 286.59 million (+13.37 million qoq / +81.51 million yoy), also partly due to new shares issued for the acquisition of SYNQ3.

The erosion in SOUN’s equity as discussed in our previous article has occurred with the potential for further dilution in the medium term, due to an inherent lack of positive free cash flow to date, with -$22.05 million reported last quarter (-58.2% (Quarterly/-51.4% annually).

At the same time, stock-based compensation expense also rose significantly to $6.97 million (+7.5% QoQ/+16.3% YoY), as insiders continue to post gains of $2.6 million in Q1 2024 ( +432% QoQ/+253% YoY).

So, is SOUN stock a buy?Sell, or hold?

SOUN 2Y stock price

For now, SOUN has given back most of its gains following its recent 1Q 2014 earnings call, as the stock appears to be retesting previous support levels of $4.90.

However, we are not sure if it is wise to add here.

SOUN Reviews

With SOUN still in a cash burn startup phase with negative EPS expected through fiscal 2025, the only few metrics we might use to evaluate the stock are FWD Sales EV/21.93x, which is significantly expensive compared to the 2023 average of 10.62x and the average of ​Sector 2.93x.

This is especially because a SaaS company needs to consistently report high double-digit growth rates over the next few years to ensure an outstanding EV/sales valuation.

Even if we were to compare SOUN’s valuations to other AI SaaS generator stocks, like C3.ai (AI) at FWD EV/sales of 7.21x, and BigBear.ai Holdings, Inc. (BBAI) at 2.61x, and Palantir (PLTR) at 16.05x, SOUN is clearly extended here, providing interested investors with a minimal margin of safety.

Meanwhile, SOUN continues to record high short interest at 23.9%, above previous levels of 14.6% in March 2024, indicating more near-term volatility.

Going forward, anyone still holding out here will have to remain (very) patient, as it remains to be seen when the company may achieve operating profitability and whether the stock may be well supported at current levels.

With more uncertainty ahead, it goes without saying that the stock is only suitable for those with a higher risk tolerance.

Repeat Hold(Neutral) here.