Is SoundHound AI Stock a Buy Now?

The company has blazing revenue growth but comes with a hefty price tag.

Artificial intelligence (AI) goes beyond what you type into an app. Using it in the real world means speaking to technology and having it understand and talk back. That’s the opportunity in SoundHound AI (SOUN -1.43%), which develops voice AI technology.

The company is successfully selling that technology, inking deals that have driven impressive revenue growth. On the other hand, it is tiny compared to its competition, and the stock has been volatile, with a wide 52-week trading range between $1.50 and $10.

Today, SoundHound AI trades toward the low end of this range. So, should investors buy the dip? Or is it destined to get lost in the competition?

Here is what you need to know.

The rise of SoundHound AI

You’ve seen voice AI depicted in Hollywood, perhaps in a superhero movie where the genius scientist talks back and forth with a virtual assistant.

This is precisely what voice AI is striving to become over time. Simply put, voice AI is software you can speak to that will follow directions and speak back to you.

Wall Street didn’t go wild for AI until early last year. But SoundHound had already been around for years. The company started with a smartphone-based song identification service and then branched out into selling voice AI capabilities to the automotive industry.

The technology has improved over time, and the company is now aggressively expanding into new fields like customer service, where it’s forging partnerships with restaurant brands to take orders in drive-thrus and dine-in locations.

It’s important to note that the company’s product isn’t unique. It competes with technology giants like Alphabet, whose Google division provides its own voice AI products.

But SoundHound management maintains that its brand- and data-neutral approach differentiates it from more-restrictive competitors, while over 270 granted and pending patents protect its core technology.

Signs of impressive execution

With a market cap of just $1.4 billion, it is a clear underdog to a trillion-dollar juggernaut like Alphabet.

Yet it is holding its own. In the first quarter, revenue grew by 73% year over year, and its backlog increased by 80% to $682 million. SoundHound is on pace to handle 4 billion queries across its platform this year, a 60% increase and a clear sign that customers are engaging with its technology.

The company is landing new clients and expanding existing ones. Applebee’s is rolling out its products to an additional 500 restaurants, and it signed Church’s Chicken as a new client.

Among automakers, SoundHound is ramping up its deal with Stellantis for its Opel, Peugeot, Vauxhall, DS Automobiles, Alfa Romeo, and Lancia brands.

What’s the secret to its success?

Many companies don’t want another company’s branding on top of their own (e.g., XYZ Google), while others don’t want to surrender transparency or control of their data. SoundHound’s approach offers customers control over their data and branding. It reminds me of how The Trade Desk has carved out its niche in digital advertising using a similar approach despite competing with far larger adversaries.

But is the stock a buy now?

It certainly looks like SoundHound’s future could be bright; while revenue for 2024 is expected to be just $77 million, a healthy $682 million backlog is encouraging. Ultimately, management must continue showing that it can land and expand with customers and eventually break into even more industries to show that the business can sustain growth. The biggest risk facing investors is that it fails to do so, and momentum stalls.

Plus, the stock isn’t cheap despite trading at the low end of its 52-week range. Investors have high expectations, considering shares trade at an enterprise-value-to-revenue ratio of nearly 18:

SOUN EV to Revenues (Forward) Chart

SOUN EV to revenue (forward); data by YCharts; EV = enterprise value.

That valuation places the stock among the most expensive in the technology sector. Generally, such high valuations are reserved for best-in-class companies.

It has plenty of potential, but it’s also a flawed company. For example, it is highly unprofitable — the cash it burned in the first quarter was twice its total sales!

SoundHound AI must prove it can dominate the competition while making money (positive free cash flow would be a start). Until that day, investors should consider the stock speculative and avoid paying the high price it currently commands.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and The Trade Desk. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.

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