SoundHound AI's Market Prospects: To Purchase or Sell by 2025?
SoundHound AI's Market Prospects: To Purchase or Sell by 2025?
Smaller AI companies, specifically those backed by Nvidia (NVDA -2.09%), experienced a significant surge in value at the end of 2024, with SoundHound AI (SOUN -1.16%) being a notable example. Nvidia invested a fairly modest $3.7 million in SoundHound, but this investment propelled the company into the limelight as a potential AI frontrunner.
Following a series of strategic acquisitions and the expansion of its customer base, SoundHound's stock price has skyrocketed recently. This surge in price has sparked debate: is it a sign that SoundHound could be the next major AI platform, or is it a warning of an impending bubble?
The reasons for SoundHound's recent popularity
SoundHound has gained traction as the go-to voice-AI system outside of tech giants, particularly within the automotive and quick-serve restaurant (QSR) sectors. The company has secured partnerships with seven out of the top 20 QSR brands, including Chipotle, for matters like phone and drive-through ordering. In the automotive sector, SoundHound's voice AI is now integrated into leading auto brands, including those owned by car giants like Stellantis, as well as four major electric vehicle manufacturers.
SoundHound's acquisition of Amelia, another voice-AI startup for enterprises, in the summer of 2024, has fortified its position in both customer service and employee-facing IT applications.
SoundHound's early lead in voice AI
Although the generative AI buzz has only been around for two years, SoundHound has been in the game since 2005. It launched its Houndify voice AI platform in 2015, giving the company a head start in developing this technology.
SoundHound incorporates third-party large language models into its products when necessary, but it sets itself apart with its proprietary model called Polaris. Built on its two decades of experience in billions of conversations and millions of hours of audio in numerous languages, Polaris is already being utilized for one-third of the company's restaurant ordering transactions, with plans to eventually integrate it into all of SoundHound's interactions across its platform.
Having exclusive access to proprietary data to build its model or enhance a general-purpose LLM, like SoundHound's vast archive of voice transaction data dating back decades, should provide a competitive edge.
SoundHound recently raised its guidance
SoundHound reported impressive 89% revenue growth in its third-quarter earnings report from mid-November 2024. Management also raised its 2024 and 2025 outlook to a range of $82 million to $85 million and $155 million to $175 million, respectively. This was an improvement from the previous quarter's guidance of $80 million for 2024 and $150 million for 2025.
While SoundHound's operating losses more than doubled from $14 million to $33 million in the last quarter, this level of investment is manageable for a company with such strong revenue growth.
However, investing in SoundHound today comes with risks
Although SoundHound has a strong lead in the voice AI vertical, that doesn't mean you should invest in the stock right now.
The primary concern is the company's valuation. With a stock price that has increased by 400% in just two months, SoundHound now boasts an astonishing $9 billion market cap. Even if SoundHound exceeds its 2025 guidance by 25% and reaches $200 million in revenue in the next year, that would still result in a valuation of 45 times next year's sales. This is an extremely high valuation, banking on significant growth for a prolonged period.
Furthermore, the rapid price increase isn't entirely driven by fundamentals. Over the last two months, there has been a frenzy in the market for AI software, quantum computing, and cryptocurrency stocks. While many of these stocks have promising futures and groundbreaking technology, it may be years before they produce any substantial profits.
Moreover, it's possible that some meme stock trading could be driving share prices. By the end of November 2024, SoundHound had a 22.1% short interest, which is quite high. Meme-style investors might be capitalizing on this high short interest by bidding up share prices before the end of the year, forcing short-sellers to cover their positions.
As shares have surged, sell-side analysts have also boosted their price targets accordingly. While this shouldn't be overlooked, it is worth noting that often analysts follow the stock price rather than lead it. Looking back to the software bubble of 2021, you can see a similar trend, which eventually burst in the following year.
A high valuation, in part fueled by short-selling coverage, can be perilous, as meme stocks have a propensity to plummet once the celebration concludes. From a broader viewpoint, a high valuation serves as a potential hazard for investors if any unfavorable circumstances arise, like an unforeseen economic downturn, unexpected competition, or an increase in interest rates. Despite SoundHound's apparent dominance in the field, it's safe to presume that major tech entities will eye an opportunity to challenge the company if the voice AI sector proves to be sizable and alluring.
SoundHound appears to be an impressive business entity – its accomplishments in expanding and enlarging its clientele and developing an exclusive voice AI model are noteworthy. The stock, however, might be better avoided due to its exorbitant valuation, which might have been artificially inflated in the past month.
If the stock prices experience a substantial drop while the company's performance improves, SoundHound may turn into a worthwhile investment opportunity at a later date. At present, investors should exercise caution and wait for a significantly reduced purchase price before considering entering the market.
After observing SoundHound's impressive earnings and revenue growth, investors might be interested in exploring opportunities for investing in the company. However, considering its current valuation of over $9 billion, which is significantly high compared to its projected revenue, there are potential risks involved. The rapid price surge might be influenced by market trends, meme stock trading, or increased analyst price targets, but it's crucial to consider these factors before making an investment decision.