SoundHound AI (SOUN 5.00%) has been one of the hottest stocks on the market in 2024 -- up over 150% already -- as investors have been buying shares of this artificial intelligence (AI) voice solutions provider in anticipation that it could become the next big company to capitalize on the growing adoption of this nascent technology.
It's worth noting Nvidia and SoftBank's investments in SoundHound AI seem to have given investors confidence in the small company's ability to capitalize on the AI opportunity, though one shouldn't forget that both companies have only small stakes in the voice AI provider. However, SoundHound AI got a reality check when the company released fourth-quarter and full-year 2024 results on Feb. 29.
The stock took a beating as it failed to match Wall Street's lofty growth expectations despite posting a solid jump in revenue. The shares have continued to remain under pressure, retreating 48% since hitting a 52-week high on March 14. Is this an opportunity for savvy investors to buy SoundHound AI stock? Let's find out.
Here's what SoundHound AI's valuation looks like right now
A big reason why investors have hit the sell button following SoundHound's latest quarterly report is because its growth just wasn't strong enough to justify its expensive valuation. The company's Q4 revenue increased 80% year over year to $17.1 million, but analysts were expecting an 87% increase. SoundHound AI also reduced its Q4 adjusted loss to $0.07 per share from $0.15 per share the previous year. However, analysts were looking for a loss per share of $0.06.
Why SoundHound needed to deliver a better-than-expected performance will become clear from the following chart.
Data by YCharts.
The stock was trading at more than 36 times sales before its earnings announcement. It did enjoy a post-earnings bounce, and its sales multiple jumped above 42. However, negative Wall Street commentary has sent the stock packing once again. Capybara Research set a price target of just $1 for SoundHound as it pointed out the company has no competitive advantage when compared to more established tech titans.
Capybara also noted that SoundHound's path to profitability isn't clear. Meanwhile, an analyst at Cantor Fitzgerald double downgraded the stock from overweight (buy) to underweight (sell) stating that it's too expensive and could be facing customer losses and intense competition. Thanks to these reasons, SoundHound AI is now trading at less than 30 times sales.
However, even that isn't what we can call cheap. The Nasdaq-100 Technology Sector index, for comparison, has a price-to-sales ratio of 7.3 as of this writing. Nvidia, on the other hand, has a sales multiple of 36, but it's growing at a much faster pace and is the dominant force in the AI chip market. Even the likes of Micron Technology can be bought at a much cheaper 6.4 times sales, and that would be a smart thing to do considering that business has also stepped on the gas big time.
So even though SoundHound AI has retreated substantially of late, it remains richly valued when there are other more established AI stocks to consider instead.
What should investors do?
Wall Street doesn't seem convinced about SoundHound's growth story yet, and that's not surprising as it's still a very small company. Its revenue in 2023 stood at just $45.9 million, even though that was a nice jump of 47% over the previous year. The company expects $70 million of revenue this year (at the midpoint of guidance) -- a year-over-year increase of 52% -- followed by at least $100 million in 2025. It's worth noting management expects revenue growth to accelerate in 2025 from 2024 levels.
If SoundHound can indeed deliver the outstanding growth it's promising and convince Wall Street of its ability to compete in the voice AI market, then it could turn out to be a solid investment in the long run and be deserving of a premium valuation.
But expectations this high mean investors will be unforgiving if SoundHound fails to deliver in the coming quarters. Investors are better off buying other AI stocks with long-term prospects that can offer more reasons to justify their rich valuations.
