There are good reasons why SoundHound AI stock is so expensive right now.
SoundHound AI (SOUN 2.19%) has been one of the hottest stocks on the market in 2024, clocking outstanding gains of nearly 140% as of this writing. But shares of the voice artificial intelligence (AI) solutions provider have witnessed a lot of volatility along the way.
The stock rocketed higher in the first three months of the year, driven by news that semiconductor giant Nvidia had made a small investment in the company. It actually peaked in March, and SoundHound AI is down 51% from that all-time high.
In other words, the initial surge the company saw in the early months of 2024 is the reason why it still trades at a very rich valuation. The company isn’t profitable yet, but its price-to-sales ratio stands at 25, or more than triple the the U.S. technology sector’s average price-to-sales ratio of 8.
While SoundHound is no doubt an expensive stock right now, the pace at which it has been growing arguably justifies its rich valuation. More importantly, the company is operating in a market that could allow it to sustain such impressive levels of growth for years to come.
So, should growth-oriented investors look past the price tag and buy SoundHound AI stock before it releases third-quarter results on Nov. 12? Let’s find out.
SoundHound AI is on track to deliver another terrific quarterly report
Demand for SoundHound’s voice AI solutions is increasing at an incredible pace, leading to terrific growth in the company’s top line. Its revenue in the first six months of the year increased 62% year over year to $25.1 million.
Analysts expect the company to report $23.0 million in third-quarter revenue, nearly matching its tally from the first half of the year. While that may seem overly bullish at first, a closer look at SoundHound’s full-year guidance indicates it could indeed live up to analysts’ expectations.
Management’s full-year outlook calls for at least $80 million in revenue, or $54.9 million in the second half of the year.
If analysts’ Q3 forecast proves accurate at $23.0 million, the company’s top line would increase 73% on a year-over-year basis. That would be a significant acceleration from last quarter and the year-ago period.
There are two reasons why SoundHound AI could indeed clock such terrific revenue growth. First, the company claims to have built a solid revenue pipeline with a cumulative subscriptions and bookings backlog of $723 million, a number that it says approximately doubled on a year-over-year basis in Q2.
Investors should note that cumulative bookings refer to the value of SoundHound’s committed customer contracts at the end of a period. Cumulative subscriptions, on the other hand, refer to the “potential revenue achievable for the company with current customers where the company is the leading or exclusive provider” over a five-year period. So, even though there is an element of uncertainty and estimation in this metric, the pace at which it’s growing bodes well for SoundHound’s future.
The second reason why SoundHound should be able to deliver such growth is its recent acquisition of Amelia, a company that provides enterprise AI software for customer service applications. SoundHound previously updated its 2024 revenue guidance to $80 million (or more) following the acquisition, as compared to the earlier expectation of $71 million.
Hitting that $80 million baseline would represent 74% growth over 2023, and management is expecting another solid year in 2025 with at least $150 million in revenue. Moreover, SoundHound points out it has a total addressable market (TAM) of $140 billion, which means the company could be at the beginning of a terrific growth curve.
But is the stock a buy right now?
By now, it’s evident SoundHound is growing at a red-hot pace, and it may be able to sustain that pace for quite some time. However, there is no doubt its rich valuation will be a sticking point for many investors who are looking to buy the stock.
But there are other AI-software-focused companies trading at even more expensive levels. Palantir Technologies, for instance, has a sales multiple of 40 despite growing at a slower pace than SoundHound.
Of course, Palantir is a leading provider in the fast-growing AI software platforms space with a bigger revenue base and newfound profitability, but the size of SoundHound’s backlog indicates it could be on its way to becoming a key player in the voice AI solutions space. After all, the company has built a solid customer base that includes the likes of Stellantis, electric vehicle (EV) manufacturers, and multiple quick-service restaurants, not to mention other lucrative markets such as AI-assisted customer service.
All this explains why SoundHound’s forward sales multiple looks much more attractive:
Data by YCharts.
Investors with a healthy risk appetite should still consider SoundHound as an attractive growth stock to add to their portfolios. When the company reports on Nov. 12, solid results are likely to send this AI stock even higher.