SoundHound AI (SOUN -1.11%) is a popular AI stock pick, primarily because it's a pure-play AI stock. There aren't many investments out there that solely offer AI solutions, but SoundHound AI is laser-focused on improving and marketing its audio recognition AI technology.
Currently, the stock trades for around $10, so if it were to rise to $100, it would deliver 10 times returns. Any stock that rises 10 times in value in a decade is an excellent investment, and investors would be wise to scoop up shares now if it has a strong potential to deliver that level of growth.
So, is SoundHound AI a stock that can deliver 10 times returns?
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SoundHound AI has the market opportunity to deliver massive growth
SoundHound AI offers audio recognition software for AI models. This isn't a new idea; voice-powered AI models like Siri and Alexa have been around for years. However, let's be honest, they have numerous problems. Whether it's a complete misunderstanding of what you say or triggering at the wrong time, they aren't what anyone would describe as ideal.
However, SoundHound AI's technology is far superior to these models and often outperforms human counterparts in the applications in which it is deployed. The market opportunity for SoundHound AI is massive. Essentially, any interaction that can be automated when one person talks to another is a target for SoundHound.
Some of the current applications for SoundHound's technology are drive-thru restaurants and businesses, automotive digital assistants, and healthcare. SoundHound AI's technology is rapidly gaining popularity, as evidenced by its impressive 151% revenue growth rate during Q1. Management expects 97% revenue growth for the full year, so this elevated growth rate is expected to persist throughout the year.
This growth rate is already partially reflected in SoundHound AI's stock, as it trades at 36 times sales.
SOUN PS Ratio data by YCharts
Most software stocks trade for around 10 to 20 times sales, so this is clearly an elevated valuation. However, most stocks aren't doubling their revenue year over year, so I think this is fairly justified. But it assumes that SoundHound AI's growth rate will return to a normal rate in 2026 and beyond.
If SoundHound AI can continue growing at an elevated rate (say, more than 50%), then its stock has plenty of room to run over the next few years. But what would it take for SoundHound AI to rise to $100?
SoundHound AI is well above the growth threshold to become a $100 stock
Over the long term, stocks mostly follow their long-term growth rates. For SoundHound AI, that means its revenue would need to rise from its current $100 million level to approximately $1 billion. There are plenty of software stocks with that level of revenue, so this isn't unrealistic.
Over the next decade, SoundHound AI's revenue must compound at a 26% annual growth rate (CAGR) to reach over $1 billion in revenue. SoundHound AI is well above that growth threshold right now, making it a strong candidate for a company that can deliver that level of growth.
As long as it can maintain that growth level for the decade, it has the potential to reach $100. Now the question becomes, can SoundHound AI find a big enough market for its product to support this rise?
I think the market is there, but don't be surprised if some of the leading AI companies also launch products that rival SoundHound AI's products. This is the biggest risk to SoundHound's future, but it has already established a strong and growing customer base.
There's a chance SoundHound AI could deliver these growth levels, but I consider it equal to the chance of failure. As a result, I believe there's a significant risk associated with SoundHound's stock, and investors should maintain an appropriate position sizing. If investors are comfortable with the risk of SoundHound's stock, I believe there's significant upside.
