Curious about SoundHound AI’s potential? Here’s why you might want to add it to your portfolio despite a lofty P/S ratio.
Spoiler alert: I’m pretty sure that SoundHound AI (SOUN 5.73%) is a great stock to buy right now, thanks to its unique technology and resourceful growth plans.
I’ve been pounding the table about this artificial intelligence (AI) innovator for nearly two years now. 2024 has seen its ups and downs, but I still see a bright long-term future for this innovative technology expert.
SoundHound AI’s evolution
SoundHound AI was a very small company with huge dreams back then. Its customer list included nearly two dozen automakers and a long list of consumer electronics makers, all aiming to build its AI-powered voice controls into their own products. But annual revenues stopped at $31.1 million and many investors wrote SoundHound AI off as a speculative start-up without a real business plan.
I didn’t see SoundHound AI that way. In my eyes, it was a mature company with two decades of operating history, though it only recently decided to raise capital via a stock market entrance with a special purpose acquisition company (SPAC) and dive head-first into an aggressive expansion strategy.
The tony revenue stream was backed by a $332 million backlog of long-term contracts. Now, trailing sales have grown to $55.5 million while that order backlog soared to $682 million. The company is not only adding more names to its client list but also making a serious push into the food service market and starting to collect some revenue from that beefy order book.
For example, auto giant Stellantis (STLA 0.53%) now includes SoundHound AI’s voice controls in new vehicles across Japan and Europe. The brand list includes household names like Alfa Romeo and Citroën, and the Stellantis version of Houndify also includes OpenAI’s ChatGPT chatbot. It’s still early, but Stellantis is leaning into its voice controls on a global level. A North American launch should come up fairly soon, and I expect that announcement to light fresh fires under SoundHound AI’s stock.
The food service business is younger. Yet, SoundHound AI’s customer roll in this sector already includes well-known chains such as Applebees, Chipotle Mexican Grill, and Five Guys. The next time you place an order through their phone menus or drive-through windows, you may very well be talking to SoundHound AI’s software bots.
SoundHound AI’s market expansion
SoundHound AI’s growth story is just getting started. The company has gone on a modest buying spree over the last year, acquiring a couple of fellow voice interpretation and AI analytics specialists, some of which brought in healthy lists of existing restaurant customers.
And I really like this company’s clear vision of a profitable future. Here’s how CEO Keyvan Mohajer explained it in the latest earnings call:
“We own our tech. We have big data from real interactions and nearly 20 years of experience. This is why we are winning,” Mohajer said. “We have three pillars: royalties from voice-enabled products, subscription from voice-enabled services, and the third pillar is monetization from connecting those services to products. As we increase the notable names that we sign every quarter — and this quarter is no different — we get one step closer to mobilizing this third pillar.”
The first two pillars of business growth are already rising, as SoundHound AI collects actual revenues from its voice control products and services in this early stage. I can’t wait to see Mohajer build “the voice commerce ecosystem of the future,” which should accelerate both the contract backlog and direct revenue streams.
The long-term investment case
That’s why SoundHound AI looks affordable today, despite a lofty price-to-sales valuation ratio and negative bottom-line earnings. The shares you buy today are a bet on continued business growth, fundamentally connected to that meaty order backlog.
It’s not exactly fair to divide SoundHound AI’s market cap by the backlog in order to estimate the company’s contract-based value, since it will take seven years to collect the full value of its average contract. A bird in the hand is worth a whole flock of unseen geese and so on. Still, that ratio works out to just 2.5 times the backlog or 17 times the average annual sales across the seven-year contract period. That’s still quite affordable next to fellow AI experts like Nvidia and Palantir, whose price-to-sales ratios dwell in the 30x range.
So no, I don’t think it’s too late to buy SoundHound AI stock. The company is worth just $1.7 billion today, and I see a multibillion-dollar AI empire growing out of this seedling in the long run. If anything, it’s high time to start building a SoundHound AI position before the stock takes off.
Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Palantir Technologies. The Motley Fool recommends Stellantis and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.