Cerence Up 155% in 2 Days: SoundHound AI’s Fierce Competitor

Key Points

• Cerence is an AI speech recognition company challenging SoundHound in one critical space: automobiles.
• The company has long-established ties to the automotive industry but is overhauling its offerings to incorporate AI.
• Shares are up 155% over just two trading days. Is there still time to get in on this small-cap stock supplied by a former Intel CEO?

Cerence NASDAQ: CRNC is an AI stock that has burst onto the radar of many investors lately. Since its latest earnings release on Nov. 21, shares have skyrocketed 155% as of the Nov. 25 close. So, what does this company do, and why am I mentioning it in the same breath as the lauded SoundHound AI NASDAQ: SOUN? I’ll answer those questions, as well as provide my overall view of the stock.

Cerence: AI Automotive Assistants Compete With SoundHound AI

Cerence builds AI virtual assistants with a special focus on the automobile market. Its solution aims to power conversational interactions between vehicles, drivers, and other passengers. In this market, it is a clear competitor to SoundHound AI. SoundHound's voice recognition platform targets the automotive market, too. However, SoundHound also competes in many other markets, including quick-service restaurants and customer service centers.

Cerence has a wide range of automotive customers, including original equipment manufacturers (OEMs) like Ford Motor NYSE: F, Geely Automobile OTCMKTS: GELYY, General Motors NYSE: GM, and several other big names.

Changes and New Products at Cerence Spark Investor Optimism

Cerence’s stock surged post-earnings as the company beat expectations on both revenue and earnings. Revenue came in 15% above expectations, while its adjusted loss per share was just $0.07 versus expectations of a $0.38 loss per share.

Cerence’s new CEO, Brian Krzanich, is adding to the optimism. He previously held the same position at Intel NASDAQ: INTC from May 2013 to June 2018. During his time there, Intel stock provided a total return of over 140%, outpacing the S&P 500 by more than 50%.

In the company's earnings call, Krzanich indicates that AI and large language models have not been central to its products in the past. He said that moving forward, the vision is to have these elements built into every product in the company’s portfolio. However, this transition is already happening. The company’s Gen-AI solutions have seen 10 customer wins and six program launches in fiscal 2024.

A particularly exciting technology for Cerence is its new CaLLM Edge model. It was developed in collaboration with Microsoft NASDAQ: MSFT. It uses an automotive-specific data set, making it ideal for communicating with one’s vehicle. Navigation, conversational interaction, and explicit car control commands are all core capabilities. This lets users adjust cabin temperature and seat position. They can also ask questions like "What's the most popular movie ever shot in Hollywood?" using their voice.

CaLLM Edge uses two language models. One is simpler and can handle certain questions when the vehicle isn't connected to the internet. The larger model can answer more complex questions when the vehicle is online. This allows users to always have access to some level of AI command capability. Automakers can choose to put one or both models into a vehicle. This is attractive because it allows them to provide a range of capabilities based on vehicle quality. For example, entry-level vehicles may only have the small model, while premium vehicles have both.

Outlook on Cerence and Final Thoughts

The company expects a 1% drop in 2025 revenue. This excludes the 2024 upfront payment for a large expiring contract. The company is switching to a more subscription-based model for its new products. It will recognize revenue over a longer period, which will likely drag down revenues in the short term.

One legitimate concern with Cerence is its debt position. The firm has $90 million in debt coming due in 2025, with only $130 million in cash and equivalents on its balance sheet. With it only projecting to generate $37 million in cash from operations in 2025, this doesn’t give it much money to play with.

Overall, Cerence is an interesting name to watch. Its new products, such as CaLLM Edge, appear exciting but are still in the early stages of generating significant revenue. The company has a 52% penetration rate in global auto production, highlighting its strong industry presence. This extensive customer base gives Cerence significant opportunities to expand the adoption of its new AI-driven solutions.

Seeing better-than-expected growth results in these new products could make this a name I would get excited about. This is especially true given that it is currently valued at around 10% of SoundHound AI’s market capitalization. This is despite having around four times more annual revenue. However, the fact that SoundHound is targeting a much larger potential market is a massive reason for this.