Artificial intelligence (AI) is a hot topic these days, but not every AI specialist has enjoyed a soaring rocket ride in 2023. Voice control systems expert SoundHound AI (SOUN 5.77%), for example, has taken a 48% price cut in 52 weeks.
Is SoundHound a great buy at these low prices, or is the stock cheap for good reason? We tapped two of The Fool's top tech experts to help you straighten out this market conundrum. Anders Bylund sees a wide-open buying window but Keith Noonan is not so enthusiastic.
Well, we are Motley after all. Read on to see how our experts arrived at conflicting conclusions about SoundHound AI.
Bull: This AI veteran deserves a second look
Anders Bylund: This company has been around the block a time or two. Founded in 2005 with an early focus on music recognition services, SoundHound has nearly two decades of AI-based audio expertise under its belt.
Investors who write it off as a newcomer may not know the full story, in other words. After evolving its technology and business plans for many years, SoundHound was ready to take the next step and go public in 2022. The company entered the public stock market through a special purpose acquisition company (SPAC), equipped with an impressive list of automaker and restaurant clients and a sophisticated system for voice-control functions.
I don't mind taking the rocky road toward a long-term success story. SoundHound keeps finding fresh customers and technology partners, including new deals with Casey's General Stores and White Castle in the last two months.
SoundHound has lots of room for continued growth. The automaker client list is far from complete, the Houndify voice control platform's foray into food service and general retail stores has only just begun, and the long-term opportunity is massive.
The SPAC-based initial public offering was poorly timed, setting early investors up for disappointment near the start of a lengthy global downturn. But that pain is in the rearview mirror and new investors don't need to worry about the clumsy market entry. SoundHound is poised to perform from here, being a firmly established leader in the promising field of AI-based voice control systems.
And the modest stock price could lead to a different exit ramp. Larger technology companies could boost their AI-powered voice control muscle with a quick and easy, modestly priced buyout. Let me remind you that voice control experts Shazam and Nuance Communications took that off-ramp in 2018 -- Apple (AAPL -0.35%) picked up Shazam for $400 million while Microsoft (MSFT 1.82%) invested $16.5 billion in Nuance -- and I think a SoundHound deal would command a billion-dollar price tag too. So Cupertino and Redmond are stocked up on voice control expertise but other tech titans could very well pursue SoundHound while the stock is valued at just $440 million.
As SoundHound carves its niche in the bustling AI audio space, it's a stock that warrants a closer look. With a modest price tag and a robust client base, it could be music to long-term investors' ears or a noteworthy acquisition target for tech giants looking to amplify their voice tech capabilities. Either way, I'm convinced that this AI veteran is deeply undervalued right now.
Bear: SoundHound is still risky after its big pullback
Keith Noonan: SoundHound AI has already found some notable success in the restaurant industry and has growth opportunities in call centers and other categories, but its expansion could proceed at an uneven pace. There are already some signs that this may be occurring.
While SoundHound grew revenue roughly 42% year over year in the second quarter, its cumulative bookings backlog grew just 20%. For comparison, revenue grew 57% year over year and the business's bookings backlog increased 46% in Q1.
SoundHound is still a relatively young company, and its growth-dependent valuation sets the stage for significant downside risk if performance comes in weaker than the market's expectations.
Even after pulling back roughly 62% from its 2023 valuation high, SoundHound currently trades at roughly 9.4 times this year's expected sales. Admittedly, the company has been growing revenue at an impressive pace lately and margins have improved, but the business still appears far away from shifting into profitability. As such, the software specialist will likely continue to rely on debt and issuing new stock in order to fund its operations -- both of which come with downsides for investors.
SOUN PS Ratio (Forward) data by YCharts
SoundHound has promising technologies, and it's possible that its Houndify platform and broader business will prove to be highly scalable and deliver strong sales and earnings performance over the long term. On the other hand, the company's current valuation already has some strong growth priced in, and charting its expansion outlook involves a significant degree of speculation.
After posting combined revenue of roughly $15.5 million across this year's first half, the company's guidance for annual revenue between $43 million and $50 million suggests meaningful growth deceleration in this year's second half. If the trend continues, investors could apply more conservative growth multiples and lower SoundHound's share price.
I certainly wouldn't short the stock, and I wouldn't be shocked if it climbs above current levels. On the other hand, I think that investors looking for the next explosive AI play should understand that there's substantial risk here.
