Wall Street loves artificial intelligence no matter what flavor it comes in. After intelligent voice leader SoundHound AI (NASDAQ:SOUN) reported second-quarter earnings on August 8, analysts engaged in a round of raising their price targets on SOUN stock.
They now have a $7.08 per share consensus view for the stock, which implies a 42% upside from its Tuesday close. Despite the AI shop producing a never-ending string of losses, Wall Street can’t get enough. And though none of the six analysts covering SoundHound rate it a strong buy, one was convinced enough of its growth potential that he upgraded SOUN stock from hold to buy.
Yet is that enough for you to buy into the AI stock? I’m not convinced it is but I think a case can be made for risk-tolerant investors.
A Mixed Bag With Potential
SoundHound AI reported revenue shot 54% higher in the second quarter as it signed up a slew of new partners to deploy its AI technology. It touted signing “one of the largest pizza chains in the world,” along with its previously announced partnership with automaker Stellantis (NYSE:STLA). The car company’s Peugeot, Vauxhall, Opel, Citroen and Alfa Romeo brands all went into full production with SoundHound’s Chat AI across numerous markets and in various languages.
SoundHound’s voice AI technology is also used in more than 10,000 food locations in the U.S., including Chipotle Mexican Grill (NYSE:CMG), White Castle, Panda Express, Jersey Mike’s and elsewhere.
But that still hasn’t translated into profits. GAAP net losses worsened 60% to $37.3 million and while adjusted losses narrowed to $14.8 million, it was only an 8% improvement. That resulted in a per-share adjusted loss of four cents. In over a decade in business, the company has never reported a profit.
It was just one year ago that SoundHound AI forecasted it would turn profitable in that year’s fourth quarter on an adjusted EBITDA basis. Instead, it posted a $36 million loss.
Wall Street Loves What It Sees
But optimism over SOUN stock remains palpable on Wall Street. After earnings, Cantor Fitzgerald raised its rating from neutral to overweight and hiked its target price from $5 to $7 per share. But it wasn’t alone. Northland Securities reiterated its outperform rating but raised its target to $6 from $5.50 per share.
Other analysts just reiterated their ratings and target prices. H.C. Wainwright maintained its buy outlook and $7 per share rating while Wedbush Securities also said SOUN stock was still a buy and kept its price target of $9 per share. Only one analyst has a higher target on the stock with DA Davidson looking for $9.50 per share, which was set back in March.
Much of the support is based on the partnerships SoundHound AI is landing. It also made several acquisitions that should help it further penetrate the rising number of fast-food restaurants using its technology.
It acquired online ordering provider and restaurant marketplace Allset as well as Amelia, a conversational AI customer service support solution. The Allset acquisition brings with it customers like Subway, Buffalo Wild Wings and IHOP. It furthers SoundHound’s goal of consumers using their cars to order food.
Earlier this year SoundHound introduced an in-vehicle voice assistant that runs a large language model on Nvidia’s (NASDAQ:NVDA) Drive platform. Nvidia previously invested in SoundHound.
A Glitch in the System
Certainly, the pace of development is picking up for SoundHound. Its reach into a number of key markets, including autos and restaurants, could see it significantly expand its business. Yet there are issues, though not necessarily for SoundHound.
For example, McDonald’s (NYSE:MCD) recently abandoned its three-year trial of AI-assisted drive-thru ordering using International Business Machines (NYSE:IBM) technology. Apparently, there were problems, including customers receiving ice cream orders topped with bacon.
While the technology may not be perfect there is an opportunity for continued improvement. For one, it could allow restaurants to have employees focus on customer experience rather than order taking.
Still, after a decade in business, SoundHound AI has yet to find the recipe to make money. Persistent losses are a problem particularly as revenue growth may be slowing. It reported an 80% increase in Q4 sales last year, which slipped to 72% in the first quarter. That’s down to 54% in the current period. As revenue growth slows, losses may be exacerbated.
That’s why I maintain that SOUN stock is best suited for risk-tolerant investors. For the rest of us, though it is better to stay on the sidelines. If SoundHound AI can eventually cut, there will be plenty of time to invest and make a profit.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
