Should Investing in SoundHound AI's Shares Be Considered?
With the surging artificial intelligence (AI) market, numerous AI-focused stocks saw a price hike, including SoundHound AI (SOUN). Over the past 12 months, its stock skyrocketed an impressive 848%, reaching new heights by January 6th. This tremendous increase was partly due to its meme stock status and H.C. Wainwright analysts boosting SoundHound's price target to $26 in December 2024.
So, is it time to invest in SoundHound AI? Let's delve into the company's background and performance to help answer that question.
SoundHound's strategic acquisitions
SoundHound provides businesses with cutting-edge AI software that understands human speech in 25 languages. This multilingual support helped generate more than half of its revenue outside the Americas during the first nine months of 2024.
Initially, SoundHound derived over 90% of its income from international markets. However, strategic acquisitions resulted in a significant surge in American sales. For instance, the incorporation of SYNQ3, a voice AI provider for the restaurant industry, and Amelia, whose AI software expanded SoundHound's presence into financial services and healthcare industries, drove this change.
Thanks to these acquisitions, SoundHound's third-quarter revenue surged an impressive 89% year over year, reaching a record $25.1 million. This substantial growth led the company to revise its full-year guidance from a minimum of $63 million in sales to $82 million. In addition, 2025 revenue projections range between $155 million and $175 million.
Acquisitions not only provided SoundHound with a revenue boost but also decreased its reliance on a single major customer. In 2023, 72% of the company's sales were attributed to its largest client. However, as of the third quarter, that percentage dropped to just 12%.
SoundHound's financial health is solid, boasting total assets of $499.7 million and over $135 million in cash and equivalents at the end of Q3 2024. This strong balance sheet contrasts with total liabilities of $203.7 million.
SoundHound's areas for improvement
While acquisitions have benefited SoundHound, they have also negatively impacted its gross profit margin. In the third quarter, the company's margin dropped significantly to 49%, from 73% in the previous year. Management expects margins to recover over time as a result of cost synergies once the acquisition integration is complete.
Despite its impressive revenue growth, SoundHound is not yet profitable. It closed Q3 2024 with a net loss of $21.8 million. However, this is not a major concern, given the company's growing sales. Many tech companies forgo profits in favor of rapid expansion.
Assessing whether SoundHound stock is a buy now
Given the rapid growth of the AI market, SoundHound is well-positioned to capitalize on its expansion. Analysts predict the AI sector to hit $244 billion by 2025, increasing from $184 billion in 2024, and eventually surpassing $827 billion by 2030.
However, SoundHound's stock price has been fairly volatile, experiencing both increases and declines over the past year. Despite these fluctuations, some analysts consider the current tech sell-off an excellent buying opportunity for SoundHound stocks.
When considering SoundHound's stock price, its price-to-sales (P/S) ratio is notable. Currently, it's much higher than historical trends, suggesting that investors are willing to pay more for each dollar of revenue, indicating the stock's overvaluation.
Therefore, while SoundHound is an intriguing investment opportunity, now may not be the best time to buy given the stock's elevated P/S ratio. It would be advisable to wait for a potential price decrease before purchasing shares.
[1] SoundHound AI (SOUN) Q3 2024 Earnings Call Transcript[2] SoundHound's Acquisitions Boosted Revenue but Lowered Profit Margin, Stocks BraveReports[3] Is SoundHound AI (SOUN) Still Overvalued? Seeking Alpha[4] Is SoundHound AI's (SOUN) Stock Trading at Too High a Valuation? Investopedia
- Given SoundHound AI's impressive third-quarter revenue surge of 89% and 2025 revenue projections ranging between $155 million and $175 million, investors might consider the possibility of investing in its stocks.
- SoundHound's strategic acquisitions, such as SYNQ3 and Amelia, not only boosted its revenue but also decreased its dependence on a single major customer, making its financial health more stable.
- To make an informed investment decision about SoundHound AI stocks, it's essential to consider factors like its current price-to-sales ratio, which is higher than historical trends, indicating potential overvaluation.
- With a forecast for the AI market to reach $244 billion by 2025 and SoundHound's position as a player in this growing sector, it's crucial to assess when the best time to invest in SoundHound AI stocks might be, taking into account market volatility and potential price fluctuations.
