Shares of SoundHound AI (SOUN 0.20%) have experienced a remarkable surge over the past year, with gains approaching 170%, vastly outperforming the broader market. This small-cap company has garnered significant investor interest, driven by the growing demand for voice-based artificial intelligence (AI) solutions. Additionally, Nvidia’s recent investment in SoundHound has further bolstered its stock performance, signaling confidence in the company’s potential despite its relatively small size.
Impressive Financial Results and Market Penetration
SoundHound AI’s financial performance underscores its rapid growth and market acceptance. In its second-quarter results released on August 8, the company reported a 54% year-over-year increase in revenue, reaching $13.5 million and surpassing the consensus estimate of $13.1 million. The adjusted loss per share also improved, decreasing from $0.07 to $0.04 compared to the same quarter last year.
The company’s voice solutions are gaining traction across various sectors, particularly in customer service applications such as restaurant ordering and automotive chatbots and conversational AI assistants. Last quarter, SoundHound AI’s Chat AI voice assistant was deployed by six brands of the automaker Stellantis. Furthermore, a U.S.-based electric vehicle (EV) manufacturer is set to integrate SoundHound’s voice assistant across its entire fleet soon, while the company continues to expand its presence with automakers in Latin America and Europe, as well as in restaurants and food ordering platforms.
Robust Revenue Pipeline and Strategic Expansion
SoundHound AI’s robust revenue pipeline is a testament to its strong market positioning. The company concluded the quarter with a cumulative subscriptions and bookings backlog of $723 million, nearly doubling from the previous year. This backlog includes committed customer contracts and potential revenue from existing customers, reflecting the company’s ability to convert its pipeline into actual revenue. However, there remains some uncertainty in this metric due to potential contract cancellations or underperformance in revenue generation from current customers.
To further capitalize on its growth opportunities, SoundHound AI has made a strategic acquisition of Amelia for $80 million. This move aims to strengthen its presence in customer service by expanding its reach in insurance, healthcare, retail, and financial services. Management anticipates that Amelia will start contributing to growth in the second half of 2024, with projections to exceed $80 million in revenue for the year. By 2025, the company expects sales to surpass $150 million, with Amelia alone contributing $45 million in recurring revenue.
Analyst Projections and Valuation Concerns
Analysts covering SoundHound AI are optimistic about its future prospects. The median 12-month price target for the stock is $7.00, representing a 36% increase from current levels. Of the six analysts, five rate the stock as a buy, while one has a hold rating. These expectations are supported by the company’s latest financial results and strategic initiatives.
Despite the positive outlook, SoundHound AI’s valuation remains a point of concern. Following its impressive rally over the past year, the stock is trading at an expensive 26 times sales. Moreover, the company has yet to achieve profitability, adding a layer of risk for potential investors. However, the company’s impressive growth trajectory and strategic expansion plans, including the acquisition of Amelia, could justify the premium valuation. Investors with a higher risk appetite and a focus on growth may find SoundHound AI an attractive addition to their portfolios.
Weighing the Growth Potential Against Valuation Concerns
SoundHound AI has demonstrated significant growth and market acceptance, positioning itself as a notable player in the voice-based AI solutions market. The company’s potential for continued success is highlighted by its strong financial performance, robust revenue pipeline, and strategic expansion plans. While valuation concerns persist, the optimistic analyst projections and the company’s ability to convert its pipeline into revenue suggest that SoundHound AI could remain a top investment in the coming year. Investors seeking high-growth opportunities in the AI sector should consider SoundHound AI, while being mindful of the associated risks.
