SoundHound Valuation: Why It's Worth 5 Times Shazam

SoundHound's Path to Public Markets

SoundHound, a voice AI innovator, is preparing for a public debut on the Nasdaq through a special purpose acquisition company (SPAC) merger with Archimedes. This transaction values the company at approximately $2.1 billion, anticipated in early 2022.

SoundHound was previously recognized as a competitor to Shazam, though less prominent. Currently, its valuation exceeds that of Shazam by a factor of 5.25 – representing a value significantly above the $400 million Apple invested for Shazam in 2018.

This raises the question: what factors contributed to SoundHound’s increased valuation, especially considering past reports detailing its challenges in establishing itself beyond Shazam’s influence, despite a user base exceeding 175 million?

Understanding the Valuation Shift

A portion of the difference in valuation may stem from the varying paths taken by both companies. Shazam’s post-money valuation in its 2015 funding round was $1.02 million.

However, our focus remains on SoundHound, as its SPAC presentation suggests substantial progress and innovation. We will examine the company’s history and the rationale behind its valuation as a double unicorn.

The company’s current success is built upon a strategic shift in focus and technological advancements.

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SoundHound’s evolution demonstrates a remarkable turnaround, positioning it as a key player in the rapidly expanding voice AI landscape.

Further investigation into SoundHound’s business model and technological capabilities is crucial to understanding its current market position.

The Evolution of SoundHound: From Music Recognition to Voice AI

SoundHound originated as Melodis Corp. in 2005, founded by Keyvan Mohajer, a computer scientist and entrepreneur of Iranian-Canadian descent. Initially, the company gained recognition for its music identification technology, similar to Shazam, first launched as Midomi.

The Midomi application was later rebranded, though the web-based version retained its original name. While still operational, music recognition is no longer the primary focus of SoundHound’s business operations.

In 2013, Katie McMahon, then VP of Sales & Marketing, predicted a significant divergence between the public perception of Shazam and SoundHound to TechCrunch’s Sarah Perez. She stated the companies would be viewed as distinctly different within a year.

This prediction took longer to materialize, as SoundHound experienced a period of relative obscurity, except for its voice assistant, Hound. Nevertheless, a review of the company’s SPAC documentation reveals a substantial shift away from its origins related to Apple’s acquisition.

SoundHound's Current Identity

Today, SoundHound primarily positions itself as a leading innovator in conversational intelligence. The company offers an independent voice AI platform designed to empower businesses across various sectors to provide superior conversational experiences for their customers.

This transformation is largely attributable to 15 years of dedicated development in voice-related technologies, with a strong emphasis on innovation. Midomi, for example, was capable of identifying songs not only from recordings but also from hummed melodies.

Consequently, SoundHound currently holds a portfolio of 227 patents, with 81 already granted and 146 currently pending.

Monetizing Innovation and Current Partnerships

Sustained innovation alone does not justify a high valuation. The company’s worth of $2.1 billion, as proposed by Archimedes’ promoters, is based on its successful monetization of its technology.

SoundHound’s press materials highlight its role in powering voice experiences for prominent global brands. These include Hyundai, Mercedes-Benz, Pandora, Mastercard, Deutsche Telekom, Snap, VIZIO, KIA, and Stellantis, among others.

Future Outlook

SoundHound’s investor presentation contains numerous figures and graphs, some of which necessitate a degree of optimistic acceptance. However, if a single key term were to be highlighted, it would be “independence.” Unlike tech giants such as Apple, Amazon, Microsoft, or Google, SoundHound possesses proprietary technology, representing a significant value proposition for its partners.

To clarify what “bespoke voice assistants powered by Houndify” entails, consider these applications, as outlined in the company’s official release: Businesses can utilize SoundHound to enable voice control in their products, allowing users to issue commands like, “Deactivate the air conditioning and lower the vehicle’s windows” in their cars, “Locate recent romantic comedy films” while streaming on television, or even submit food orders via devices or at drive-thrus.

This capability forms the basis for revenue generation. SoundHound empowers clients to enhance customer experiences and increase profitability, translating into financial returns through royalties, subscription fees, and advertising-based monetization. However, quantifying this potential remains challenging. The company currently estimates net revenue around $20 million, but forecasts a substantial increase to $1.164 billion by 2026.

While we maintain a degree of skepticism, SoundHound has attracted significant investment from prominent companies, validating its unicorn status and supporting its projections. Its investor base has become increasingly strategic over time, exemplified by a $100 million funding round in May 2018, sourced entirely from industry-focused investors: Tencent Holdings Limited, Daimler AG, Hyundai Motor Company, Midea Group, and Orange S.A.

Regarding its SPAC arrangement, the deal includes a $111 million common equity PIPE, fully committed and “anchored by Oracle, Qatar First Bank, Koch Industries, and MKaNN Ventures, alongside investments from Cota Capital, VIZIO, HTC, FIH Mobile (a Foxconn Technology Group company), Structural Capital, Provco Group, Sompo, Pejman Nozad, and others.” Nozad, currently a founding manager partner at Pear VC, was an early investor in SoundHound.

This broad support demonstrates that SoundHound’s ambitions extend beyond the automotive sector; its overarching mission centers on “connecting individuals with brands through conversational AI.” This focus, incorporating artificial intelligence, positions the company within opportunities exceeding the scope of a simple Shazam comparison.

Notably, news emerged last April regarding Microsoft’s acquisition of Nuance Communications for $19.7 billion – its second-largest acquisition following LinkedIn. Sources indicated to The Exchange that this mega-deal would stimulate activity in the AI venture capital market, a prediction that appears to be materializing, particularly concerning exits involving companies at the intersection of voice, AI, and the Internet of Things.

SoundHound’s SPAC documentation suggests a total addressable market exceeding $160 billion. This valuation is derived from various data points, including projections of 75 billion connected devices by 2025. This figure aligns with current growth trends; Cisco anticipates 27.1 billion networked devices this year, an increase from 17.1 billion in 2016.

Furthermore, the presentation cites Juniper Research estimates of over 8.4 billion devices interacting with voice assistants by 2024. The translation of these interactions into revenue remains uncertain, but the optimism of SoundHound and its investors is now more readily understood.

We anticipate the transaction will be finalized as scheduled in the first quarter of 2022. We will continue to monitor SoundHound’s proposed stock ticker, SOUN, and assess whether the market concurs with the company’s valuation.