Riding AI-themed euphoria and given the seal of approval by AI heavyweight Nvidia’s investment in the company, SoundHound AI (NASDAQ:SOUN) has been one of the year’s biggest success stories. That is clearly evident by the share gains accumulated so far in 2024 – all 274% of them, with a full quarter not even in the bag yet, while even a mixed Q4 report was not sufficient to derail the story.
However, now one market participant thinks it’s time to put a dampener on proceedings. Earlier this week, Capybara Research released a short report, setting its sights on the voice recognition specialist, and equipped with a long list of why the company is something of a sham. The nub of it is that Capybara has taken a short position in SOUN AI shares (for the second time recently after issuing a short report on February 27) with a $1 price target. That represents about 85% drop from current levels.
“SoundHound is a failing company peddling lies and deception,” says the research firm. “It reminds us of the old saying ‘lies, damned lies, and statistics’, except in SoundHound’s case, they don’t provide statistics, because no amount of massaging could make the numbers look good.”
So, what are the details behind such a damning verdict? Capybara’s gripes are many. For one, the firm claims investors are being mislead regarding the company’s AI capabilities. SoundHound promotes their product as “world-class AI,” comparable to ChatGPT, but in reality, this isn’t accurate. “The Houndify product uses commodity speech recognition to search a manually programmed knowledge graph,” says Capybara. “And it only works for a small set of domains, such as weather, sports scores, etc.” It also often provides outdated and incorrect information. Moreover, SoundHound’s speech recognition technology is a “commodity service” that vies for market share alongside similar offerings from companies like Amazon, Google, Microsoft, Apple, Cerence, and numerous others.
Capybara also questions the overall health of the company, saying it is concealing the fact that it has lost significant clients, such as Mercedes-Benz, Deutsche Telekom, and Netflix. SoundHound received payments from these lost customers to terminate their contracts. Subsequently, SoundHound utilized these one-time payments to paper over the “deteriorating fundamentals,” by categorizing them within their regular product income rather than separately identifying them as non-recurring.
Additionally, in the 2022 10K filing, SoundHound disclosed a retention rate of 80%. However, this crucial statistic is curiously absent from the 2023 10K filing. “SoundHound is losing money and there’s no clear path to profitability,” the research firm goes on to add.
While Capybara recommends selling SOUN shares, that view contrasts with Wall Street’s general take. Based on a mix of 4 Buys and 1 Hold, the stock claims a Strong Buy consensus rating. However, it looks like some analysts also think the shares are due some sort of correction, given the $7.36 average target represents downside of 4% from current levels. It will be interesting to see whether analysts downgrade their ratings or increase their price targets shortly. (See SOUN stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
