3 Reasons Why SOUN Is a Risky Bet and One Alternative Stock Worth Considering

SoundHound AI’s Recent Stock Performance

Over the past six months, SoundHound AI’s share price has plummeted by 42%, falling to $8.27 since September 2025. This significant drop may leave investors questioning their next steps.

Should you consider adding SoundHound AI to your portfolio now, or is caution warranted?

Why We’re Not Enthusiastic About SoundHound AI

Even though the stock is more affordable, we remain skeptical about SoundHound AI’s prospects. Below are three reasons we’re steering clear of SOUN, along with a stock we prefer instead.

1. Weak Gross Margins Undermine Profit Potential

For software companies, gross profit reveals how much revenue remains after covering essential costs like servers, licenses, and key staff. These expenses are typically a small fraction of revenue, which is why software businesses often enjoy high profitability.

However, SoundHound AI’s gross margin is well below the industry average, indicating it faces higher infrastructure expenses compared to leaner peers such as ServiceNow. Over the past year, its gross margin averaged just 42.4%. In practical terms, SoundHound AI spent $57.64 out of every $100 earned just to keep its operations running.

Investors look not only at current gross margins but also at their trajectory. Improving margins can fuel future profits and cash flow. Unfortunately, SoundHound AI’s gross margin has dropped by 33 percentage points over the last two years—one of the steepest declines among software companies.

2. Extended Payback Periods Slow Returns

The customer acquisition cost (CAC) payback period measures how long it takes for a company to recover the money spent to gain a new customer. This figure helps gauge how efficiently a business turns sales and marketing investments into revenue.

Recently, SoundHound AI’s efforts to attract new customers have not paid off, as its CAC payback period was negative this quarter. This means the company’s spending on sales and marketing exceeded the additional revenue generated, highlighting operational inefficiency and the need for ongoing investment in a competitive market.

3. Persistent Cash Burn Raises Red Flags

We place a strong emphasis on free cash flow because, ultimately, cash is essential for meeting obligations—accounting profits alone aren’t enough.

SoundHound AI’s aggressive reinvestment strategy has depleted its cash reserves over the past year, restricting its ability to reward shareholders. Its average free cash flow margin was negative 58.7%, meaning the company burned through $58.68 for every $100 in revenue generated.

Our Verdict

While SoundHound AI isn’t fundamentally flawed, it doesn’t meet our investment criteria. After its recent decline, the stock trades at 15.6 times forward price-to-sales, or $8.27 per share. Although some may see potential, we don’t view it as a compelling opportunity right now. We believe there are stronger alternatives available. For example, consider a leading Aerospace company with a proven M&A track record.

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