The Nasdaq Composite (^IXIC 1.59%) entered a bull market 16 months ago, and the technology-heavy index has already advanced 50%. Those gains have left many stocks trading at pricey valuations, but certain Wall Street analysts still see SoundHound AI (SOUN 2.24%) and Roku (ROKU +2.49%) as compelling buys.
Specifically, Gil Luria at DA Davidson recently raised his price target on SoundHound AI to $9.50 per share, 167% above its price of $3.55 at the close Friday. Similarly, Alicia Reese at Wedbush Securities put a price target of $120 per share on Roku, 111% higher than its closing price of $56.90 on Friday.
NASDAQ: SOUN
Key Data Points
1. SoundHound AI
SoundHound specializes in conversational intelligence, also called voice artificial intelligence (AI). Its products can be incorporated into all manner of smart devices across numerous industries, including automotive, restaurants, customer service, and hospitality. The company also provides developer tools that allow brands to build customized voice AI interfaces for any product or application.
SoundHound is growing quickly. Its revenue soared 80% to $17 million in the fourth quarter, a slight deceleration from its 84% growth in the previous year. Meanwhile, gross margin expanded 6 percentage points and the company reported a GAAP loss of $0.07 per diluted share, an improvement from its loss of $0.15 per diluted share in the prior year.
In other news, SoundHound recently completed its $25 million acquisition of SYNQ3 Restaurant Solutions, a company that specializes in conversational intelligence in the food and beverage industry. Closing that deal made SoundHound the largest voice AI provider for restaurants, according to CEO Keyvan Mohajer.
SoundHound also released several noteworthy products throughout the year, including the ones listed below:
- Dynamic Interaction with Generative AI is a multimodal (voice and touch) interface that blends proprietary machine learning and third-party generative AI models (like ChatGPT) to answer commands with text and audio feedback.
- Employee Assist guides restaurant workers through actions and answers questions.
- Smart Answering lets businesses handle customer service interactions with voice AI.
- SoundHound Chat AI is a voice assistant that uses proprietary machine learning and third-party generative AI models to answer commands with text and audio feedback.
Collectively, SoundHound believes its conversational intelligence products will address a $160 billion market opportunity by 2026. Wall Street expects the company to grow sales at 50% annually over the next two years. That consensus estimate makes its current valuation of 17.7 times sales seem reasonable. However, the odds of triple-digit percentage returns over the next year are remote at best, and investors should be clear on the competitive risks before buying the stock.
Specifically, with a market capitalization of $1.1 billion, SoundHound is a small company facing massive competitors like Amazon and Microsoft. Management sees its independence -- its voice AI platform is not owned by a major public cloud -- as an advantage because brands that rely on big tech solutions "frequently experience decreased ability to innovate, differentiate, and customize" their products. That may be true, but competition is still a risk.
NASDAQ: ROKU
Key Data Points
2. Roku
Roku is an important cog in the streaming media value chain. It is the most popular streaming platform in the United States and Canada as measured by viewing time, and Roku OS is the best-selling TV operating system in the United States, Canada, and Mexico. In short, Roku can engage viewers more effectively than competing platforms, and consumers have a clear preference for its products. Indeed, almost half of broadband households in the United States have at least one Roku device.
Roku reported mixed financial results in the fourth quarter. Revenue increased 14% to $984 million as the advertising market continued to rebound. To elaborate, brands set conservative ad budgets throughout 2022 and into 2023 as they braced themselves for challenging economic conditions, but the feared recession never arrived, and management says that headwind is easing. However, Roku reported a GAAP loss of $0.55 per diluted share, missing the loss of $0.52 per diluted share analysts expected.
The stock plummeted following the report, but not only because Roku missed estimates on the bottom line. Investors were also disappointed by its guidance. In particular, management predicted gross profit would be $370 million in the first quarter, but Wall Street expected it would guide for $373 million. That news hit investors especially hard because it came two days after The Wall Street Journal reported that Walmart was in talks to acquire Vizio.
On the earnings call, CEO Anthony Wood said, "I can't comment on that. That's a rumor." But Walmart made the news official a few days later, meaning its relationship with Roku has flipped from partner to competitor. To elaborate, Walmart's private label Onn televisions previously incorporated the Roku OS, but Onn models will now run the Vizio SmartCast OS. That could be a major headwind for the company, so investors should pay attention to what management says when Roku announces first-quarter earnings results on April 25.
Looking ahead, Roku is theoretically well positioned to benefit as connected TV ad spending increases given its strong market presence. Indeed, Wall Street expects Roku to grow sales at 18% annually over the next five years. But that projection includes a lot of uncertainty. It is too early to know how Roku might be impacted by Walmart acquiring Vizio or Amazon pushing into ad-supported content.
In that context, a few good quarters could alleviate concerns and send Roku shares much higher. But the opposite is also true. I doubt shareholders will see triple-digit returns in the next year, and investors should be careful buying this stock right now. Personally, I would wait until Roku releases its first-quarter results. If management provides encouraging commentary, consider buying a small position.
