SoundHound AI Inc (NASDAQ: SOUN) is expected to report $23.68 million in revenue for its third financial quarter on November 12th.
While that translates to an exciting 78% annualized growth, the artificial intelligence company is still projected to lose 8 cents a share – down only marginally from 9 cents per share a year ago.
That’s one of the reasons why analyst Danil Sereda remains “cautious” on SoundHound shares ahead of the earnings release. He finds the valuation of this AI stock “too generous” following a 75% gain over the past two months.
SoundHound stock lacks organic growth
Danil Sereda is dovish on SoundHound as it “has high sales and marketing costs” and is concerned about the company’s reliance on acquisitions to drive growth.
In August, the AI firm spent $80 million to buy Amelia to expand its reach across multiple industries.
But Sereda does not expect the full benefits of that deal to materialize in the near term.
On the other hand, SOUN is “questionable” in terms of organic growth that could stand in the way of it keeping momentum beyond the AI mania, the analyst added as he dubbed organic growth “the most important thing for a growth company” in a recent report.
Danil Sereda is convinced that much of the good news is already priced into SoundHound stock now that it’s trading at more than 4 times its price in early February.
Note that SOUN shares do not currently pay a dividend to appear any better positioned for healthy total returns either.
SoundHound continues to lose money
Analyst Danil Sereda recommends caution on SoundHound stock also because it’s burning money and is expected to remain in loss for another two years.
He expects operating losses as well as cash outflows to make it a lot more challenging for the management to scale operations.
“SoundHound stock remains a high-risk investment in the medium term because, despite the business expansion, its fundamental issues appear to remain unchanged,” the analyst argued.
Note that SOUN has formed a bearish flag and head and shoulder patterns as well that made our market expert Crispus Nyaga recently forecast a sharp pullback in its shares to $4.0.
The Nasdaq-listed firm could struggle also because giants like Alphabet Inc. are committed to expanding their footprint in its niche voice AI assistant market as well.
Still, Wall Street continues to see potential in SoundHound AI Inc.
Analysts currently have a consensus “buy” rating on the AI firm with D.A. Davidson even calling for an upside to $9.50 which indicates potential for another 34% gain from here.
So, it all comes down to the risk appetite.
If you’re not an aggressive investor who’s comfortable with higher risk in pursuit of higher potential returns, consider sitting this one out.
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