SoundHound AI's Q3 Gross Margin Expansion Masks Persistent Dilution and Losses, Reinforcing Skepticism

What happened

A Zacks article highlights sequential improvement in GAAP and non-GAAP gross margins for SoundHound AI in Q3 2025, framing it as a potential turning point for the stock. However, the DeepValue master report reveals that this margin expansion occurs against a backdrop of severe financial strain, with Q3 2025 free cash flow burn at -$32.8 million and ongoing reliance on an ATM equity program fueling dilution. The company's cost structure remains problematic, with personnel costs at 61.7% of opex and fixed cloud commitments of $78 million due through 2028, undermining operating leverage. Monetization revenue was only $114 thousand in Q3 2025, indicating that the much-hyped 'agentic voice commerce' narrative has not yet translated into meaningful financial contributions. Thus, while gross margins show some improvement, the core issues of cash burn, dilution, and unprofitability persist, as detailed in recent SEC filings.

Implication

The margin improvement is a minor positive but does not address the fundamental financial risks, such as the company's explicit need for additional financing beyond its ATM program. Continued reliance on equity issuance means per-share value erosion is likely to persist, especially with share count already rising from 286.6 million in March 2024 to approximately 420.1 million by February 2026. Upcoming catalysts, like the FY2025 results on February 26, 2026, must demonstrate adjusted EBITDA profitability and a material reduction in free cash flow negativity to shift sentiment. Without measurable progress in synergy realization from acquisitions and a slowdown in dilution, the stock's risk-adjusted return remains skewed negative, as outlined in the base and bear scenarios. Investors should await concrete evidence of operating leverage and better revenue visibility before considering any position, given the fragile market sentiment and high downside boundaries.

Thesis delta

The gross margin expansion aligns with the low-probability bull case but does not alter the core investment thesis, which remains centered on proving EBITDA improvement while slowing dilution. Margin gains alone are insufficient to offset the structural challenges of high cash burn, fixed costs, and equity dilution, reinforcing the 'POTENTIAL SELL' rating. The thesis shift is minimal; focus stays on the upcoming earnings report and subsequent filings for confirmation of operational leverage or further deterioration.