Artificial intelligence (AI) has many different applications. One budding area in the AI realm that big tech firms are exploring right now is voice-recognition software.
"Magnificent Seven" members Microsoft, Apple, Amazon, Alphabet, and Nvidia are all investing heavily in AI-powered speech.
Yet despite big tech's pursuit of this technology, a smaller player has made headlines this year. SoundHound AI (SOUN 0.22%) specializes in voice-recognition software for the restaurant, automobile, and smart home industries.
Earlier this year, shares of SoundHound AI soared following news that Nvidia is an investor with the company.
Although the stock has retreated from its peak levels, it's still up over 80% year to date. When you compare that to the 3% return of the Nasdaq Composite, you might be wondering if SoundHound AI can be a million-dollar opportunity.
AI-powered voice technology is an enormous market
The market for voice-recognition technology could reach $50 billion by 2029, according to Statista. Considering this tech can be integrated into vehicles, smart-home appliances, and various business settings, it's easy to see why so many of the world's largest enterprises are pursuing the technology.
Moreover, venture capital investor Chamath Palihapitiya recently posted on X (formerly Twitter) that voice represents the "front door" to the next phase of the AI revolution.
Palihapitiya could be onto something here. Over the last year or so, the world has become captivated by the rise of ChatGPT. Its creator, OpenAI, recently announced the company is exploring applications in AI-powered speech.
Given the potential size of the market and the number of high-profile companies competing, it's intriguing that such a small-scale player like SoundHound is receiving so much attention.
SoundHound AI is in the spotlight but ...
Though Nvidia published the 13F filing disclosing its investment in SoundHound in February, it has been an investor with the company since 2017. This was before SoundHound went public, and it was raising funds from venture capital firms and prominent tech giants.
In 2023, SoundHound AI grew revenue 47% to $45.9 million. Moreover, the company reduced its operating losses by 51% -- reporting negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $35 million.
The growth is attractive, but it doesn't fully explain the triple-digit gains the stock has seen at various points in 2024.
Can investing in the company make you a millionaire?
For illustrative purposes, I'll assume SoundHound sustains its 2023 growth rate through 2030 to project future sales. By doing so, the company would generate roughly $680 million of revenue by 2030.
The stock also trades at a price-to-sales (P/S) multiple of about 18 as of this writing. Considering there is a lot of competition entering the voice-recognition market, and the company's path to profitability is unproven, I'll trim its long-term P/S multiple in half to 9.
These assumptions result in a future market capitalization of $6.1 billion for the stock. This is roughly 5.5 times its current market cap of $1.1 billion, which means you'd have to invest more than $180,000 to get to $1 million.
Not only is that a lot of money for any single position, but there are risks for SoundHound that make any significant investment particularly dicey.
The table below breaks down consensus analyst estimates for SoundHound's revenue through 2025:
| Category | 2025 Estimate | 2024 Estimate | 2023 Actual |
|---|---|---|---|
| Revenue | $102.8 million | $69.5 million | $45.9 million |
Data source: Yahoo Finance
On the surface, the growth trends in the table above are in line with the assumptions I made above. However, alarm bells went off when I noticed a change in terminology on SoundHound's reported financials.
Specifically, management updated how the company accounts for its backlog, which now includes ramped-up deals with clients that aren't guaranteed. The details in company filings further indicate that SoundHound is recognizing sources of non-recurring revenue in any given quarter, but management is classifying these transactions as royalties and subscriptions in its financials.
This makes it hard to get a sense of SoundHound AI's true, normalized revenue profile. Therefore, forecasting the company's growth is an even more daunting exercise.
Given the risks around hyped-up, small, and unprofitable companies, I think the stock is more of a momentum play. Long-term investors should beware of momentum stocks. Rather, if you're interested in the voice-recognition market and its proliferation across the AI spectrum, investors have no shortage of other opportunities in much more established, proven businesses.
