Is This a Sign That SoundHound AI Is Becoming a Safer Stock to Buy?

SoundHound AI (NASDAQ: SOUN) emerged as a top artificial intelligence (AI) stock to own this year after investors learned that Nvidia had invested in the business. It was a great vote of confidence in the up-and-coming voice AI business that the prestigious company invested in its operations. Many retail investors saw this as a sign that SoundHound may be the real deal and the next big AI stock to own.

But when SoundHound reported its earnings numbers, it didn't exactly prove that it was the next Nvidia, and some of that excitement has cooled off. The company was growing at a fast rate, but its operations have been unprofitable, and it's been dependent on a particular sector of the economy (automotive) for growth.

In the company's most recent earnings report, its revenue numbers looked better and the business appeared more diverse. Does this mean that SoundHound is less risky to invest in? Could this be an ideal time to buy shares of this AI stock?

Strong revenue growth and a broader mix of customers

A big concern for investors is when a business is highly reliant on a single customer. Not only does it mean the company will become dependent on how well that other business is performing, but it can also imply that the products and services it's offering aren't as useful to other customers or adaptable to other types of businesses. That can create significant question marks, especially for a company like SoundHound, which is in the early stages of growth.

In SoundHound's third-quarter results, which went up to the end of September, the company again generated fantastic revenue growth, with sales rising by 89% year over year to $25.1 million. But according to the company's earnings report, the increase in revenue was primarily due to SoundHound's recent acquisitions of AI companies Amelia and SYNQ3.

SoundHound says that its largest customer now accounts for 12% of revenue, compared with 72% in the same period last year. A year ago, 90% of its revenue came from the automotive sector, and now, the company's customer mix is much more varied with automotive, financial services, restaurants, healthcare, and insurance sectors each accounting for 5% to 25% of its top line. Here, too, investors should be careful not to read too much into these results, given the big impact from acquisitions.

When SoundHound announced its acquisition of Amelia, a key benefit was that the business contained a diverse customer base that included "hundreds of large enterprise brands." By adding the business to its operations, SoundHound has technically diversified its customer base. However, it's difficult to tell how much of that diversification, if any, came as a result of the company's organic growth.

Ongoing losses are still a problem

One area where there's still a glaring issue for SoundHound is on the bottom line. The company's operating loss for the quarter more than doubled to $33.8 million. While the company's revenue has risen at a fast rate, the problem is that operating expenses are increasing more quickly (likely due to acquisitions), as they more than doubled from the same period a year ago.

SoundHound is diversifying and growing its business at a fast rate but still isn't showing that it's doing so in a sustainable way where it's on a path to profitability. The company also reported $136.4 million in cash and cash equivalents as of the end of the period, which isn't a whole lot when you consider it burned through $75.8 million during the past nine months.

Has SoundHound become a better buy?

There are positives to take away from SoundHound's latest earnings numbers, but this is still a risky business to invest in. The company is growing but spending heavily to do so. Until that changes, I'd hold off on buying the stock.

The danger for investors is that with the company's continual cash burn and lack of profitability, frequent share offerings may remain the norm for the business for the foreseeable future. This would result in not only dilution, but also put downward pressure on the stock, which could limit its upside and potentially lead to losses for investors who buy it today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.