SoundHound AI (SOUN +4.93%) was one of the hottest stocks on the market in 2024, with phenomenal gains of 836% that year. Investors were buying stock in this conversational artificial intelligence (AI) solutions provider hand over fist thanks to its eye-popping growth. But the company's expensive valuation seems to have caught up with it this year.
SoundHound stock has shed 46% of its value in 2025 so far. That's not surprising. Investors became risk-averse because of the tariff-fueled trade war that led to an increase in the risk of a global recession, leading to a sell-off in expensively valued stocks. SoundHound was trading at an expensive 90 times sales at the end of 2024 following its red-hot surge, which explains why it saw a sharp sell-off this year.
The recent plunge in SoundHound stock brought its market cap to $4.33 billion as of this writing. However, the stock still trades at an expensive 39 times sales, which exposes it to the possibility of more downside. That's why it would be a good time to take a closer look at another fast-growing company that's trading at a much more reasonable valuation, and that has the potential to overtake SoundHound's market cap in the next three years.
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AI-fueled chip demand is driving an impressive turnaround for this chip company
Ambarella (AMBA +1.59%) may not be a household name in the global chip market, as it is a small company with a market cap of $2.65 billion. However, the growing adoption of AI in devices such as security cameras, vehicles, drones, wearables, and Internet of Things (IoT) devices is giving its business a major boost.
NASDAQ: SOUN
Key Data Points
Ambarella's computer vision processors integrate video processing, image processing, audio processing, and AI algorithms into a single platform, making them ideal for deployment in the edge applications listed above. The company believes that the growing adoption of AI in edge devices is going to be a key growth driver for it in the long run.
The market for chips that are capable of processing AI workloads locally in edge devices instead of sending data to the cloud is expected to grow by 20x by 2034. Ambarella is already getting a good chunk of its revenue from this segment, with edge AI accounting for 70% of the company's top line in fiscal 2025 (which ended on Jan. 31).
The chipmaker finished the year with a 26% increase in revenue to $285 million. Ambarella management noted an improvement in both volumes shipped and the average selling price (ASP) last year. Importantly, Ambarella forecasts higher ASPs going forward thanks to the growth opportunity in edge AI.
Not surprisingly, Ambarella's revenue forecast of $81 million to $87 million for the first quarter of fiscal 2026 points toward stronger growth of 54% on a year-over-year basis. Even better, the company expects to deliver a profit of $0.04 per share in the quarter, compared to a loss of $0.26 per share in the year-ago period.
NASDAQ: AMBA
Key Data Points
The good part is that Ambarella's robust bottom-line growth is expected to continue in the current fiscal year and beyond. The company sees its addressable market growing to more than $8 billion in fiscal 2028 thanks to the advent of AI, a 60% improvement over fiscal 2024 levels. Ambarella's revenue in the previous fiscal year tells us that it still has a lot of end-market opportunity to capture, which could lead to sustained growth in its top line.
At the same time, the company points out that its new chips command above-average ASPs, which should translate into fatter margins and faster earnings growth in the future. This explains why Ambarella is expected to swing to a profit in the current fiscal year from a loss of $0.16 per share in the previous one, followed by terrific earnings growth over the next couple of years.
Data by YCharts. EPS = earnings per share.
Ambarella's stronger growth could lift it above SoundHound AI
While Ambarella's earnings growth is expected to take off, the same cannot be said about SoundHound, as the latter is expected to remain a loss-making company for the next three years.
Data by YCharts.
So, the market is likely to reward Ambarella stock with stronger gains on account of its improving earnings power. Moreover, SoundHound's valuation indicates that the stock has run ahead of itself. Ambarella, meanwhile, trades at a much cheaper 9 times sales. Analysts expect Ambarella's top line to hit $463 million after three years, which could send its market cap to $4.2 billion if it continues to trade at 9 times sales at that time. That would be a 60% jump from current levels.
SoundHound's top line, meanwhile, is projected to jump to $277 million after three years, which means that it will have to command a premium valuation to keep up with Ambarella. However, a price-to-sales ratio of 9 at that time would result in a significantly lower market cap than Ambarella, suggesting that there is a strong possibility of SoundHound AI being overtaken by this semiconductor stock in the next three years.
