When a management team predicts its revenue will double during its next fiscal year, investors should pay attention. This isn't a common occurrence, and it can reveal broader trends in the industry whenever a company predicts revenue will have a big jump.
SoundHound AI (SOUN 2.42%) recently made this exact prediction, and investors responded by sending the stock up following earnings. Could there be even more room to run with revenue projected to double?
SoundHound AI has huge growth ahead of it
SoundHound is clearly an artificial intelligence (AI) company, but how it uses AI is different. Instead of requiring a text input, it uses audio.
This is extremely useful in multiple situations, like drive-thru ordering or a digital assistant in a vehicle. Furthermore, any situation where you talk to someone on the phone could be a target for SoundHound's automation.
Various digital assistants (like Amazon's Alexa and Apple's Siri) have been used for some time. However, none of them offer the performance that SoundHound does, making this a key technology to watch.
Demand for its products has already been incredible, and it's still increasing. In the fourth quarter, revenue rose 101% to $34.5 million. That brought its 2024 revenue up to $84.7 million, and management projects that its 2025 sales will be between $157 million and $177 million, or about double what it generated last year.
NASDAQ: SOUN
Key Data Points
While 2025 appears to be quite strong, so do the years beyond. Revenue backlog, a measure of the total contract value remaining, sits at nearly $1.2 billion, up 75% year over year. This huge amount of revenue is still to be realized, and investors shouldn't be surprised to watch this number tick up throughout 2025 as new contracts are signed.
SoundHound isn't profitable, but it's in a great position. By the end of 2025, management says, it should be profitable on an adjusted basis. This isn't actual profitability by any measure, but it is an important milestone to reach along the way. Furthermore, the company has $200 million in cash and no debt on its balance sheet, so it can continue fueling its growth.
The company has a ton going for it, but the stock has become rather expensive over the past few months.
The stock's valuation has tumbled over the past two months
Although the company's valuation is well off its highs, it's still expensive.
SOUN PS Ratio, data by YCharts; PS = price to sales.
At 41.2 times sales, the stock has a premium valuation, but it's justifiable because revenue should double over the next year. At the end of 2025 (assuming its stock price stays the same), it should trade for around 20 times sales, which is about what many other software companies trade for these days.
However, with a massive revenue backlog that extends for multiple years down the road, we know that the business' rapid growth will be extended for several years. So, it's smart to assume that the stock price has about a year or two of growth already baked into it. With that in mind, I think you are OK to take a position in the stock if you believe this or are OK with these three factors:
- SoundHound's rapid growth will extend well past 2026.
- You can handle volatility, since the stock can be quite volatile.
- Your holding period is at least three to five years.
If you are all right with these assumptions, then I think you're safe to take a position in SoundHound AI; you'll just have to be patient because the stock is bound to have some wild swings due to its high valuation and the company's rapid growth and relatively small size.
