The artificial intelligence ("AI") market remains hot for chip stocks, but enterprise AI software stocks are still struggling despite rising deal flows. SoundHound AI, Inc. (NASDAQ:SOUN) is another AI stock with promising order flow, but a stock stuck at the lows with financial results not necessarily matching the sector. My investment thesis is far more Bullish on the stock, trading at the lows following the latest deal.
AI Voice Push
SoundHound AI has a lot of promising deals in the automotive and restaurant space. The AI voice company doesn't have a lot of revenues despite a backlog topping $341 million, though only up 13% YoY.
A lot of the backlog is for automotive deals with contract terms of up to 10 years. The average contract in the backlog has a term of 6.5 years.
In essence, the backlog isn't really going to move the narrative in the short term. The really exciting category is the push into AI voice ordering in the restaurant space.
SoundHound AI announced some big new restaurant deals recently and a deal in the space of more than doubling units under contract. The restaurant opportunity is projected at more than $1 billion, with domestic restaurants sitting at 1 million potential customers.
The voice AI company had previously disclosed a deal with White Castle, and now Jersey Mikes and Krispy Kreme have been added to the mix. On the Q3'23 earnings call, CFO Nitesh Sharan highlighted the current potential in the space:
With solely the brands we have signed to-date, at scale and full deployment across these customers’ groups, we would now have over 4,500 locations and well over $25 million in ARR.
SoundHound AI announced an additional push into voice AI for restaurants with the recent deal for SYNQ3 Restaurant Solutions for $25 million. The company now boasts over 10,000 restaurant locations signed with a pipeline of 100,000 locations.
The big question is the revenue impact, with SoundHound AI projecting $25 million in annual ARR with 4,500 locations signed and this deal more than doubling the locations. The company only paid $25 million, suggesting the revenue potential is probably far below the run rate from SoundHound AI, with a similar amount of locations signed to deals.
The deal is for 80% in stock and 20% in cash. That SoundHound AI would only pay $5 million in cash while the remainder is in stock is a good sign that SYNQ3 shareholders see a potential upside in the public stock.
Big Q4
SoundHound AI reported Q3 revenues of $13.3 million for a new record quarter quarterly amount. Revenues only grew 19% YoY from the peak revenue level of $11.2 million last Q3.
The company saw revenue dip all year until this September quarter. The key is guidance for Q4 revenue of between $16 to $20 million. SoundHound AI would take a massive step forward with such revenue growth, and the SYNQ3 deal could provide the icing on the top, with some additional revenue thrown into the mix.
The stock has a market cap in the $500 million range and the investment story gets very interesting with the 2024 revenue targets at $70+ million. The company forecasts being adjusted EBITDA profitable in the current quarter, but the analyst estimates suggest a year-end revenue flush, with March revenues dipping again.
SoundHound AI already has signed deals for $25 million in voice AI for restaurants, and the SYNQ3 deal on the surface would suggest the amount doubles to $50 million. While the ARR from the acquisition isn't clear and the $25 million deal value suggests a lower value, SoundHound AI will still have the potential to add 10x these signed locations and possibly upsell the SYNQ3 locations to higher value service of Dynamic Interaction and Smart Answering products.
The biggest risk to the story is the balance sheet and whether SoundHound AI can become adjusted EBITDA profitable during Q4. The AI company has cut a ton of costs in the last year, but the balance sheet only has a cash balance of $110 million. If management can't cut cash burn that hit $54 million YTD after Q3, shareholders will face additional dilution.
Takeaway
The key investor takeaway is that SoundHound AI, Inc. is making a lot of progress on voice AI deals. The company is set to report a big Q4 with a strong pipeline. If the company can turn the new acquisition and the big restaurant pipeline into solid revenue growth, investors will be rewarded here, with the stock trading at the lows of around $2.
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