Where Will SoundHound Stock Be in 5 Years?

Generative artificial intelligence (AI) is taking Wall Street by storm -- minting plenty of millionaires in the process. The technology promises to allow machines to replace human labor in tasks that require knowledge, memory, and communication. And if analysts at Bloomberg are correct, it could grow to become a $1.3 trillion market as soon as 2032.

Naturally, small companies like SoundHound AI (NASDAQ: SOUN) would like to claim a slice of this epic opportunity. Let's dig deeper to see if it has what it takes to succeed over the next five years and beyond.

A very grounded take on the AI opportunity

While many AI software companies target new-fangled business models that can be difficult for some to understand, SoundHound keeps things simple. It aims to capitalize on the natural synergy between large language models (LLMs) and older technologies like speech recognition to create voice AI platforms with use cases in customer service, automotive assistants, and many other applications.

The company has already secured several partnerships with mainstream restaurants like Krispy Kreme and White Castle, which are using its software in some of their drive-through locations.

The value proposition is clear. Customers hate long lines, and SoundHound claims its automated systems can currently improve ordering time by around 10%, potentially adding almost $200,000 to a single location's annual revenue and boosting its margins by saving on human labor costs. Remarkably, SoundHound's management also claims that these systems are more accurate than humans, which will be key to customer satisfaction and long-term industry adoption.

SoundHound has also seen success in the automotive industry, securing partnerships with Stellenatis (which has its voice assistants installed in several of its European brands) and Lucid Motors, which partnered with SoundHound for its Lucid Assistant launched in January.

Is SoundHound ready for prime time?

SoundHound's results show mixed performance. On the surface, everything looks great. First-quarter revenue soared 151% year over year to $29.1 million, although net losses expanded slightly to $22.3 million. However, this growth wasn't solely the result of the organic adoption of SoundHound's core, voice-enabled AI software solutions.

Instead, the expansion has been driven by acquisitions, including restaurant ordering platform Allset and enterprise AI specialist Amelia, both purchased in 2024. While these buyouts are boosting growth, they make it harder to track the success of SoundHound's original business. Investors should expect the company's growth to decelerate sharply as quarterly comparables become more difficult next year.

Image source: Getty Images.

Acquisitions can also put pressure on a company's liquidity and cash flow, especially if they aren't profitable. Despite the surge in revenue, SoundHound's gross margin declined from around 60% to 37%, likely reflecting the impact of the new businesses it has added to its portfolio.

That said, with $246 million in cash and no debt, the company looks capable of maintaining its current level of cash burn for now.

Is SoundHound stock a buy?

Any company with a pile of cash can generate superficial growth by constantly buying other companies. However, the challenge for SoundHound will be to turn this roll-up strategy into a cohesive and synergistic business over the next five years; that's easier said than done.

According to an analysis conducted by Fortune magazine, a whopping 70% to 75% of acquisitions fail to meet their stated objectives because of factors like overpayment and poor synergies with the parent company. With that in mind, investors shouldn't get carried away by SoundHound's near-term growth. The future will be challenging. And it may make sense to wait for more information before considering a position in the stock.

Should you invest $1,000 in SoundHound AI right now?

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.