SoundHound AI (NASDAQ:SOUN) shares have surged 30.8% since July 31, closing Friday at $8.02 after a 13.3% gain. The rally follows the company's second-quarter earnings report, which showed revenue of $61.9 million, beating the consensus estimate of $52.39 million by 18.1%. However, the company's guidance for the full year only saw a 1.0% increase at the midpoint, implying that second-half quarterly revenue will need to average $69.5 million to meet expectations.
The stock's recent performance has been remarkable, with back-to-back double-digit percentage gains after the earnings release. Friday's trading volume was more than double the stock's average, reflecting heightened investor interest. The market's reaction underscores the strong quarterly outperformance, but the modest guidance increase has put the spotlight on the company's ability to convert its large pipeline into revenue in the second half.
In the second quarter, SoundHound reported a GAAP gross margin of 45.1%, up from 39.0% a year ago, as acquisition-related impacts lessened. Non-GAAP gross margin remained steady at 58.4%. The company's adjusted EBITDA loss narrowed to $9.6 million from $14.3 million, and non-GAAP EPS improved to -$0.02 from -$0.03. These results are provisional until the Form 10-Q is filed.
SoundHound raised the lower end of its 2026 revenue guidance to $230 million from $225 million, while keeping the upper end at $260 million. With first-half revenue of $106.1 million, the company now needs $138.9 million in the second half to hit the midpoint of $245 million. This implies a significant acceleration from the second quarter's $61.9 million, with quarterly averages required ranging from $62.0 million at the low end to $77.0 million at the high end.
Chief Executive Keyvan Mohajer expressed confidence, stating that the company's pipeline has never been larger and its win rate has never been better. However, he also noted that some elements of large deals may not recur, making deal sizes difficult to predict. Investors are watching closely to see if the pipeline converts into tangible results.
Financially, SoundHound holds $203 million in cash with no debt, but operating cash outflows increased to $60.0 million in the first half from $43.7 million a year earlier. Stock-based compensation and related payroll taxes accounted for approximately 35% of quarterly revenue. The market capitalization stands at $3.49 billion, or about 14.2 times the midpoint of guidance.
Wall Street's reaction has been mixed. D.A. Davidson's Gil Luria maintained a Buy rating but cut the price target to $10, while Piper Sandler's James Fish kept a Neutral rating with a $7 target. The average analyst target is $12.71, implying potential upside of 58.5% from Friday's close. Luria cited strong OASYS demand and key customer wins, while Fish acknowledged robust license deals but expressed concerns about execution on new business.
Looking ahead, the upcoming shareholder vote on the LivePerson (NASDAQ:LPSN) merger is scheduled for August 20. Glass Lewis has recommended support for the deal. SoundHound's current guidance does not include the acquisition's impact. Over the next week, investors will focus on estimate revisions and additional merger details.
Risks remain, including the GAAP net loss of $42.8 million in the quarter, rising operating cash outflows, and the pace of large deal closures. The outcome of the LivePerson vote could also affect second-half revenue. Despite the strong rally, the company faces a challenging path to meet its revised guidance.
