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SoundHound AI (NASDAQ: SOUN) disappointed a lot of investors after it went public by merging with a special purpose acquisition company (SPAC) in April 2022. The audio and speech recognition specialist started trading at $8.72 per share on its first day as a combined company, but it’s now worth about $2 per share. Like many other SPAC-backed businesses, SoundHound lost its luster as rising interest rates cast a harsh light on its slowing sales growth, steep losses, and high valuation.

SoundHound’s revenue rose 47% to $31 million in 2022, and it expects sales to jump 39%-61% to $43 million to $50 million in 2023. Yet it had previously told investors it could generate $98 million in revenue in 2023 during its pre-merger presentation. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss also widened from $54 million in 2021 to $73 million in 2022 — but the company insists its adjusted EBITDA margin will turn positive by the fourth quarter of 2023. With an enterprise value of nearly $500 million, SoundHound still trades at nearly 11 times this year’s sales.

Image source: Getty Images.

I personally wouldn’t touch SoundHound at these levels, but some investors might still be interested in this volatile stock as a speculative play on the artificial intelligence (AI) market. But before pulling the trigger, they should consider these three other aspects of SoundHound’s business that only the smartest investors will likely know.

1. It has customer-concentration issues

SoundHound’s three largest customers accounted for 67% of its revenue in 2022, compared to 61% of its revenue in 2021. Its two biggest customers were responsible for 75% of its consolidated accounts receivable balance at the end of 2022, compared to five customers that accounted for 86% of that balance at the end of 2021.

SoundHound didn’t name those customers, but its clients include automakers like Honda, Hyundai, and Stellantis; tech companies like Qualcomm, Block, and Oracle; and smaller restaurant chains like Crust Pizza and White Castle.

If SoundHound loses just one of its top customers to Microsoft‘s (NASDAQ: MSFT) Nuance Dragon, Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Cloud AI, or another voice recognition platform, its revenue could abruptly drop off a cliff.

2. It expects to struggle in China

SoundHound currently generates less than $1 million in revenue annually in China, but it expects that figure to rise significantly as it expands deeper into the Chinese market.

Yet SoundHound’s latest 10-K filing suggests that expansion won’t be easy. It admits the voice AI market in China is a “highly competitive” one filled with “both international and smaller domestic manufacturers,” and that competition could “result in price reductions, reduced margins, and SoundHound’s inability to gain or hold market share.”

SoundHound notes a lot of its largest customers in China are automotive original equipment manufacturers (OEMs), which exposes it to the slowdown of the Chinese auto market, and that new cybersecurity laws and data privacy restrictions could hamper its growth. It also believes the political tensions between the U.S. and China could “negatively impact” its plans.

3. Its insiders are net sellers

The bulls claim SoundHound will keep growing as it locks in customers who don’t want to tether themselves to a tech giant like Microsoft or Google. They’ll also tell you it’s a compelling takeover target as more companies upgrade their AI platforms.

But over the past three months, SoundHound’s insiders sold over 6 times as many shares as they bought. Over the past 12 months, they dumped nearly 8 times as many shares as they bought. That chilly insider sentiment is a bright red flag.

SoundHound AI still has a lot to prove

SoundHound is still growing rapidly, and its decision to lay off nearly half of its workforce earlier this year could help it gradually narrow its losses. Unfortunately, its high valuation, customer concentration issues, challenges in China, and its lack of insider interest all indicate it’s not the right time to buy this speculative AI stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet and Qualcomm. The Motley Fool has positions in and recommends Alphabet, Block, Microsoft, Oracle, and Qualcomm. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.

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