SoundHound AI (NASDAQ: SOUN), a leading developer of voice control systems and other AI-based interfaces, experienced a significant decline in its stock price during the month of January. Shares fell by 21.7% according to data from S&P Global Market Intelligence. This decline can be attributed to a combination of fierce competition and investor wariness towards unprofitable growth stocks.
SoundHound AI is not alone in this downward trend. Other companies operating in the same space, such as C3.ai (NYSE: AI) and IonQ (NYSE: IONQ), also saw their stock prices plummet. These companies share a common characteristic of being unprofitable, yet they are focused on pursuing growth opportunities in the risky but promising tech market.
The decline in SoundHound AI’s stock price had two significant triggers. Firstly, long-time customer BMW announced a voice assistant deal that involved integrating Amazon Alexa with Amazon’s large language model (LLM). This seemed to leave SoundHound AI’s existing assistant out of the equation. Secondly, a startup offering free big-screen TVs financed by a second screen with constant advertising selected ChatGPT as the voice control system, providing direct competition to SoundHound AI’s Houndify platform.
Although investors initially had concerns about these challenges, their worries seemed to dissipate over time. This allowed the stock prices of C3.ai and IonQ to align with the decline experienced by SoundHound AI. The broader decline in the market can be attributed to a gloomy earnings report from Samsung, which was followed by mixed results from other tech giants as the first earnings season of 2024 began.
While these companies are experiencing impressive sales growth, their lack of profitability has raised red flags for investors. C3.ai, for example, has a net loss margin of 92%, while IonQ’s net loss margin is a staggering 681%. These companies are sustaining themselves through stock-based compensation policies, taking on new debts, and using their existing cash reserves. Such high-risk strategies have caused Wall Street to react with caution, prompting the drop in stock prices.
Despite the negative bottom-line figures, some growth investors are willing to overlook them in favor of focusing on the companies’ robust sales growth and optimistic future prospects. IonQ appears to be the most burdened by risk, with negative free cash flows twice its current cash balance over the past year. However, the company remains debt-free for now. C3.ai, on the other hand, is approaching a cash burn rate similar to its cash equivalents, but its profit margin is improving, and it has no debt.
SoundHound AI’s financial situation is less secure, with its cash reserves nearly depleted by annual cash burn. Additionally, the company carries a significant loan balance. Despite these challenges, SoundHound AI boasts an impressive customer list and accelerating revenue growth. However, investing in the company does come with inherent risk.
In summary, the decline in stock prices for SoundHound AI, IonQ, and C3.ai in January can be attributed to a combination of fierce competition and investor concerns over the profitability of these companies. While there are prospects for a turnaround, potential investors should carefully consider the elevated level of market risk associated with investing in these volatile growth stocks.
