Artificial intelligence (AI) has been the investment star of 2023, and 2024 will likely bring more of the same. This has people searching high and low to find the best AI stocks and buy them before the year ends.
One of those stocks is SoundHound AI (SOUN +0.67%), a company that specializes in (you guessed it) using AI to turn audio into data a model can use. But could this company be one of the best AI investments in 2024? Let's take a look.
SoundHound AI's products have a few target customers
SoundHound AI has been around for a while. It started with a group of students at Stanford in 2005. Over time, the company slowly evolved from a music recognition app into voice recognition software that multiple companies deploy.
Among the two main clients are automakers and restaurants. For restaurants, the value proposition is obvious: Soundhound AI's product can automate the order-taking experience in the drive-thru and store.
For example, SoundHound AI partnered with burger chain White Castle to automate its drive-thru experience. Compared to a human order-taker, SoundHound's product bested the baseline by taking and processing the order in under 60 seconds and achieving a 90% order completion rate. Although White Castle is a relatively small chain, if SoundHound's products are deployed by bigger chains nationwide, it could see significant revenue expansion.
NASDAQ: SOUN
Key Data Points
To further bolster its offerings, SoundHound recently merged with SYNQ3, a voice AI leader in the restaurant industry. This adds more than 25 national and multinational customers to SoundHound's portfolio and also adds revenue synergies because the two were tackling different opportunities in the same space.
On the automotive side, SoundHound's products are used as digital assistants. Stellantis recently rolled out SoundHound AI's latest model in the European market. The AI integrates into the vehicle's assistant, allowing drivers to further increase the tasks they can accomplish without the use of their hands.
The investment story for Soundhound AI is there, but how are the financials?
SoundHound is losing a lot of money
Although the merger with SYNQ3 will change SoundHound's finances, the best investors have to go off of is its latest Q3 results. They were quite strong; SoundHound's revenue rose 19% year over year to $13.3 million. However, the biggest item to consider is SoundHound's backlog, which sits at $341 million.
That's a lot of revenue waiting to be recognized, and if SoundHound delivers on its products, it will be solid growth for the company.
Because SoundHound is still in the growth-at-all-costs phase of its business, it shouldn't surprise investors that it's losing money. In Q3, it had an operating loss of $14.5 million -- more than double its revenue. This may be concerning, as it would indicate SoundHound could go under. But, the company recently took on some debt to increase its cash balance, which is about $110 million.
That's enough to keep it afloat for some time, but with its successful product, it wouldn't be hard for SoundHound to raise more money.
The last item to consider is SoundHound's valuation. A stock with a great story and strong financials can still be a losing investment if it's not bought at the right price.
SOUN PS Ratio data by YCharts
At 12 times sales, SoundHound isn't cheap, but it's not expensive either. I think investors can purchase SoundHound shares as long as they're OK with the risks involved with a moon-shot-style investment. SoundHound AI may go to zero, or it could explode higher. Because of that, I'd keep my position relatively small, around 1%. That way, if it goes bust, it doesn't drastically harm the portfolio, but it could grow into a much larger position with some success.
But do I think it will be 2024's best AI stock? It's hard to tell. There are more surefire investments. But if it has a great year on the business side, it may take home that prize.
