SOUN - SoundHound: The Valuation Is Not Sound

2024-06-23 11:04:30 ET

Summary

• Nvidia's investment in SoundHound caused a massive rally, and there are indeed some positives like strong revenue growth in relative terms and early trends suggesting robust operating leverage.
• On the other hand, if we add industry size to the conversation, it turns out that SOUN's footprint in the industry is almost invisible.
• The industry is expected to compound with a massive 30% CAGR over the next decade, but SOUN's tiny CAPEX spending suggests that there are almost no barriers to join competition.
• The multitude of risks and uncertainties outweigh the positives, rendering the current $1.3 billion market cap irrelevant.

Investment thesis

It seems that like in one famous cartoon everything Nvidia ( NVDA ) touches turns to gold. Sometimes this perception goes too far, like SoundHound's ( SOUN ) massive rally in 2024. The stock soared in February when Nvidia reveled its investment in it. In reality, Nvidia invested almost nothing in SOUN compared to its $3 trillion market cap. I think that Nvidia makes hundreds of investments like this every year, but the hype around SOUN was especially strong....

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