SoundHound AI (SOUN 1.23%) stock has rallied about 130% so far this year. The developer of audio and speech recognition tools impressed the bulls as it grew rapidly and attracted a new investment from Nvidia (NVDA 1.45%).
SoundHound has carved out a niche in the AI market with two main platforms: its namesake app, which identifies songs from short audio clips, and Houndify, a platform that allows companies to develop their own speech recognition tools.
Houndify drove most of the company's growth as revenue rose 47% in both 2022 and 2023. It expects its revenue to grow at least 74% in 2024 and rise by more than 88% from that baseline in 2025 as it expands its ecosystem with more acquisitions.
Image source: Getty Images.
Those growth rates are incredible, but SoundHound's stock isn't cheap at 20 times this year's sales. It might still be a good speculative play on the AI market, but it might not have as much upside potential as smaller niche AI plays that are trading at lower valuations. So let's examine one of those underappreciated small-cap plays -- Evolv Technologies (EVLV +2.41%) -- and see if it might replicate SoundHound's gains over the next few years.
What does Evolv Technologies do?
Evolv's AI-powered security screening systems are designed to replace traditional metal detectors. They can scan people about 10 times faster than a metal detector, and they don't require them to empty their pockets, open their bags, or slow down. Two people can also walk through the system simultaneously, and it can process up to 4,000 people per hour. The system uses "ultra-low frequency, electromagnetic fields and advanced sensors to detect concealed weapons."
Evolv serves more than 750 major customers -- including schools, hospitals, and major sports teams -- and it screens over a million people each day. It's deployed more than 4,000 of its express units worldwide and says it detects at least 1,000 weapons every day. It also provides a cloud-based platform for storing and analyzing data. Bill Gates and Jeb Bush's Finback Investment Partners were notably Evolv's top investors prior to its public debut.
NASDAQ: EVLV
Key Data Points
How fast is Evolv Technologies growing?
Evolv went public through a reverse merger with a blank-check company in July 2021. However, in a pre-merger presentation, the company claimed it could grow its revenue from $20.2 million in 2021 to $132.3 million in 2023. It also predicted its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would turn positive with a slim profit of $5.2 million in 2023. But here's what actually happened over the past three years.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Revenue |
$23.7 million |
$55.2 million |
$80.4 million |
|
Growth (YOY) |
395% |
133% |
46% |
|
Adjusted EBITDA |
($49.3 million) |
($69.5 million) |
($49.8 million) |
Data source: Evolv Technologies. YOY = Year over year.
Evolv clearly overpromised and underdelivered, but it continued to gain new customers in a challenging macro environment. It attributes that expansion to a growing need for tighter security measures in America.
For 2024, Evolv expects its revenue to rise 24% to about $100 million as its adjusted EBITDA improves by more than 40%. Analysts expect its revenue to rise 27% to $102.1 million as it narrows its adjusted EBITDA loss to $32.9 million.
From 2023 to 2026, they expect its revenue to grow at a compound annual growth rate (CAGR) of 28% as its adjusted EBITDA turns positive in the final year. Based on those expectations, Evolv's stock looks reasonably valued at 4.5 times this year's sales. It also ended the second quarter of 2024 with no debt and $56.7 million in cash, cash equivalents, marketable securities, and restricted cash on its balance sheet -- so it certainly won't go bankrupt anytime soon.
What are Evolv Technologies' weaknesses?
Evolv's security systems are innovative, but they're also expensive. A traditional metal detector costs about $10,000. Evolv's systems are sold as a service which locks its customers into four-year contracts at a rate of $2,500 per month. That means it costs $120,000 to cover a single door throughout an entire contract.
The gap between Evolv's pre-merger estimates and its actual numbers suggests the macro headwinds shrank its total addressable market over the past three years. It also faces stiff competition from similar advanced weapons detection and security system providers like SafePointe, Xtract One, and Athena Security. That pressure could limit Evolv's pricing power, squeeze its gross margins, and prevent it from ever generating a profit.
Could Evolv attract as much attention as SoundHound AI?
Bill Gates' investment initially cast a spotlight on Evolv's public debut, but its stock has declined about 70% over the past three years. It clearly disappointed its investors by broadly missing its own expectations, and its future still looks murky.
Evolv's stock might bottom out here, but it won't attract as much attention as SoundHound -- which is growing faster, backed by Nvidia, and has more upside potential as it expands across the restaurant, auto, and consumer device markets.
Evolv is a niche AI play, but it probably won't bounce back like SoundHound unless it grows faster, expands its total addressable market, and narrows its losses. It's an interesting speculative stock, but it definitely isn't a screaming buy yet.
