Picking the top-performing artificial intelligence (AI) stock a year out isn't easy. In 2023, it ended up being Nvidia. In 2024, all signs are pointing toward Palantir Technologies. This shift from AI hardware to AI application software was predictable because it has to be deployed and become useful at some time for all of the investment dollars in hardware to pay off.
As a result, I think we'll see another AI software company rise to the top in 2025. My prediction is that it will be SoundHound AI (SOUN +4.59%), even though it has already had an incredibly strong 2024, rising over 300%. So, how can a company that has already risen so much be a top pick for 2025?
SoundHound's reach has widened in 2024
SoundHound AI's platform is centered around taking a voice input and turning it into a prompt for an AI platform. This has multiple uses, including automaking, restaurants, financial services, insurance, and healthcare. The company already has products serving those industries, and automakers and restaurants are some of its largest clients.
Still, the company has become quite diversified in 2024. During last year's third quarter, 72% of revenue came from one client, and 90% of total revenue came from the automotive sector. Now, the largest client contributed only 12% of revenue, and the largest sector made up 25% of revenue.
That diversification is a key part of SoundHound becoming more relevant in all industries and turning into a more stable company. If that single client left in late 2023, it might have caused the business to go belly up. If its largest client leaves now, it will still hurt, but not as much as it would have before.
NASDAQ: SOUN
Key Data Points
While SoundHound still has risks associated with it, this plays a huge part in lowering that risk level.
In the third quarter, revenue grew 89% year over year to $25.1 million. This makes it a small-cap stock, as its revenue in the past 12 months totals $67 million. For other, more established software companies, that would be a fairly small percentage of overall revenue, but the company isn't expected to stay there for long.
Management projects 2025 revenue will come in between $155 million and $175 million, which is nearly double the revenue it projects for 2024. Clearly, SoundHound expects its business to maintain its boom for 2025.
This also highlights a key investment point: How high is the limit if its products become the industry standard in audio recognition? Think of all the ways we use voice to control what we do; now, imagine that being associated with the power of AI. SoundHound could become a huge winner in this space, even after it has run up so much.
A lot of success is built into its stock price
Perhaps the biggest risk with SoundHound is its valuation. Investors need to be aware of the success that's already baked into the stock's price. Its valuation tips the scales at around 40 times sales, which historically is very expensive.
SOUN PS ratio, data by YCharts; PS = price to sales.
However, we also know that SoundHound's current trailing-12-month revenue is set to triple by the time 2025 ends (if management's projections come true), which would price the stock in a more reasonable valuation range -- somewhere around 20 times sales. The problem is that the stock must stay at the same price. If the company's business continues to boom, its stock isn't going to stay put.
Although I'm excited about 2025, it's clear that all of that year's financial growth is already assumed in the stock price. As a result, if the business stumbles, the stock will take a nosedive.
Still, I think there are hefty tailwinds blowing in SoundHound's favor, and I wouldn't be surprised if management ends up beating 2025 expectations, since it has raised its guidance multiple times in 2024 (that year's revenue was originally projected to be between $63 million and $77 million; current guidance is for $82 million to $85 million).
If SoundHound AI forecasts that it will continue doubling its revenue in 2026, I think that would keep the hype going in the stock, and be enough to propel it to become the best-performing AI stock in 2025.
