SoundHound AI (SOUN +1.83%) stock has delivered outstanding gains of 119% so far this year, but a closer look at its price chart shows that it has witnessed a lot of volatility. Shares of the company that's known for providing voice artificial intelligence (AI) solutions are down 48% from their 52-week highs hit in March this year.
SoundHound AI stock has witnessed such a sharp pullback for various reasons, ranging from factors out of its control to analyst downgrades to a short report. Additionally, the stock's expensive valuation means that it has to keep delivering high growth rates so that investors don't press the panic button.
NASDAQ: SOUN
Key Data Points
The stock did pop last month after releasing first-quarter results, but it hasn't been able to sustain that momentum. In other words, good news has been in short supply for SoundHound AI investors. So it wasn't surprising to see SoundHound AI stock getting a lift after it announced on June 10 that it is making moves to strengthen its balance sheet.
Let's look at what SoundHound has done and check if this news could help the stock go on a bull run.
SoundHound is now a debt-free company
SoundHound AI has reached an agreement with its lenders that will allow it to prepay its entire outstanding debt of $100 million in full. Thanks to this move, SoundHound won't have any debt on its balance sheet.
What's more, the company says that the prepayment will help it save $55 million in interest and charges that it would have had to pay in case it carried the loan for the remaining duration. Additionally, SoundHound will now have access to $14 million worth of cash that was restricted earlier. In all, SoundHound now has a net cash balance of $180 million.
CFO Nitesh Sharan believes that SoundHound AI's debt-free balance sheet and cash position "will allow us to move even more nimbly to capture the increasing customer demand for our voice AI solutions." That won't be surprising as debt-free companies can move quickly in their business decisions since they don't need to consult creditors. Also, no debt means more financial stability in case of any downturn.
The cash that SoundHound has managed to free up by prepaying its outstanding debt can also be used to hire more employees or increase working capital. So it wasn't surprising to see SoundHound stock popping just over 2.5% after this news came out. But is this move good enough to warrant an investment in this AI stock right now?
The valuation is expensive, but investors may want to look at the bigger picture
SoundHound AI stock is currently trading at 23 times sales, which is nearly double the sales multiple it was sporting at the end of 2023. But the company's recent growth has been robust enough to justify its expensive valuation. This is evident from the chart below, which shows that the increment in SoundHound's price-to-sales ratio is slower than its revenue growth, especially following its pullback.
SOUN PS Ratio data by YCharts
Moreover, the company's guidance suggests that its terrific growth is here to stay. SoundHound expects to finish 2024 with revenue between $65 million and $77 million. The midpoint of that guidance range would translate to a year-over-year increase of 55% at the midpoint, which would be an improvement over the 47% annual revenue growth SoundHound delivered last year.
Analysts are expecting the company's top-line growth to remain solid next year as well.
SOUN Revenue Estimates for Current Fiscal Year data by YCharts
One reason SoundHound can keep up such healthy growth levels is that it was sitting on a cumulative subscriptions and bookings backlog worth $682 million in the previous quarter. This metric, which consists of "committed customer contracts" and the potential revenue the company can achieve from its current customers over a five-year period, increased 80% year over year last quarter.
Of course, there is an element of uncertainty in this metric if customers move to SoundHound's competitors. However, SoundHound has built a solid base of customers already in the automotive and restaurant sectors, including automaker giant Stellantis and donut vendor Krispy Kreme.
This is the reason Wedbush analyst Daniel Ives has an outperform rating on SoundHound stock with a $9 price target, which points toward potential gains of 93%. Meanwhile, its 12-month median price target per the seven analysts covering the stock stands at $7, which would translate to 50% gains from current levels.
Investors with a higher risk appetite could consider buying SoundHound as it may be able to justify its lofty valuation. And for those who worry about the valuation, it may be a good idea to buy into this AI stock if it becomes available at cheaper levels considering its rapid growth and healthy backlog.
