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Is SoundHound AI Stock a Buy Now?
Key Points
SoundHound AI’s second quarter earnings crushed analysts’ expectations.
The company raised its revenue guidance for the full year.
But it’s unprofitable, its gross margins are slipping, and its valuations look frothy.
SoundHound AI (NASDAQ: SOUN), a developer of AI-powered audio recognition services, posted its second-quarter earnings report on Aug. 7. Its revenue surged 217% year over year to $42.7 million and exceeded analysts' expectations by $9.8 million. On the bottom line, it narrowed its adjusted net loss from $14.9 million to $11.9 million, or $0.03 per share, which also cleared the consensus forecast by two cents.
For the full year, the company expects its revenue to rise 89%-110%, compared to its previous guidance for 85%-109% growth and analysts' expectations for 97% growth. Those impressive numbers sparked a post-earnings rally, but the stock remains more than 40% below its all-time high from last December.
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Let's see if this volatile AI growth stock is still worth buying.
Image source: Getty Images.
Why is SoundHound growing so rapidly?
SoundHound's namesake app helps people identify songs with just a few seconds of audio or a few hummed bars. But it generates most of its revenue from Houndify, a developer-oriented platform which enables companies to customize their own voice recognition services.
It's a popular option for businesses which don't want to share their voice data with a tech giant like Microsoft or Alphabet's Google. Its growing list of customers includes automakers like Stellantis, quick-serve restaurants like Chipotle, and tech giants like Tencent. Here's how its revenue, adjusted gross margins, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have changed since its public debut in 2022.
|
Metric |
2023 |
2024 |
1H 2025 |
|---|---|---|---|
|
Revenue |
$31.1 million |
$45.9 million |
$71.8 million |
|
Revenue Growth (YOY) |
47% |
85% |
187% |
|
Adjusted Gross Margin |
76.2% |
58.5% |
55.3% |
|
Adjusted EBITDA |
($35.9 million) |
($61.9 million) |
($36.5 million) |
Data source: SoundHound AI. YOY = Year-over-year.
SoundHound's revenues are soaring, but its acceleration was mainly driven by its acquisitions of the AI restaurant services provider SYNQ3, the online food ordering platform Allset, and the conversational AI company Amelia throughout 2023 and 2024. Without those acquisitions, its core business would have grown at a much slower rate.
As SoundHound expanded, its growing dependence on lower-margin restaurant service revenue, rising cloud infrastructure costs, and high onboarding and customization expenses for its new customers compressed its gross margins. That pressure could worsen if the company relies on more acquisitions to drive its top line growth.
However, SoundHound believes its gross margins will stabilize and improve over the long term as economies of scale kick in and it expands its higher-margin software licensing and royalties segment, which integrates Houndify into cars and other connected devices.
But is SoundHound getting overvalued at these levels?
From 2024 to 2027, analysts expect SoundHound's revenue to grow at a compound annual growth rate of 47% as its adjusted EBITDA turns positive by the final year. But with an enterprise value of $4.14 billion, it already trades at 25 times this year's sales. The company has also more than doubled its number of shares since its public debut, and that dilution should continue for the foreseeable future.
SoundHound's declining margins, steep losses, high valuation, and persistent dilution should limit its upside potential, even as its revenue keeps rising. That might be why Nvidia sold its entire stake in SoundHound earlier this year, and why its insiders sold nearly seven times as many shares as they bought over the past 12 months.
So while SoundHound might be a promising play on the expansion of the "agentic AI" market, investors shouldn't pay the wrong price for the right stock. It could be worth nibbling on at these levels, but I wouldn't accumulate a bigger position unless the company proves that it can grow its business organically and stabilize its gross margins.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Chipotle Mexican Grill, Microsoft, Nvidia, and Tencent. The Motley Fool recommends Stellantis and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short September 2025 $60 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
