SoundHound AI (SOUN 3.66%) is an interesting artificial intelligence (AI) stock. It's one of the few pure-play AI application companies on the market, and it's a relatively small company at a $3.6 billion market cap. This means that if a large customer base adopts its product, the stock could produce huge returns.
I think SoundHound AI is set up to deliver great returns in 2026, but they could be hampered by one thing.
Image source: Getty Images.
SoundHound AI's audio recognition software is dominating two industries
SoundHound AI makes software that links generative AI and audio recognition technology. This is a critical piece of software because getting humans to interact with AI models instead of with other humans is no easy task. However, SoundHound AI is already seeing success in deploying its software to applications like restaurant drive-thrus and digital assistants in vehicles.
The real test will be how SoundHound's software performs in a customer-service application. There are countless call centers filled with human agents that could deploy SoundHound's software and make a huge difference both for the client and SoundHound AI's revenue. However, it's still unknown how the consumer will react. When greeted by a robot customer service agent, many people rush through the options to speak with a human. If SoundHound AI can accurately replace a person on the other side of the phone with an agent that's just as effective and can process complex questions, then SoundHound AI could be a huge winner.
NASDAQ: SOUN
Key Data Points
The problem is that the acceptance of its software is widely out of SoundHound AI's hands and in the consumer's hands. I get a bit nervous when a company doesn't control its own destiny. Still, SoundHound can produce the best possible solution, which may steer the industry in that direction regardless of consumer acceptance.
In Q3, it signed a French insurance company that will bring AI capabilities to its call center. It also announced that three of the top 10 global financial institutions bought additional services. There is clearly momentum in adopting SoundHound's product, but we're still a few years away from knowing for sure if its product is catching on.
In the meantime, SoundHound is still delivering great results, with revenue rising 68% in Q3. It also raised its full-year outlook -- a bullish sign for investors. Wall Street analysts project strong growth for 2026, with revenue forecast to rise about 37%. This all adds up to a strong company, and after its recent pullback, it can be purchased at the cheapest level in more than a year.
SOUN PS Ratio data by YCharts
At 27 times sales, SoundHound AI isn't the cheapest stock, but it is lower than in the past. This could be a good price, but there's one item investors must keep an eye on.
SoundHound AI is a long way from profitability
SoundHound AI is forgoing profits to capture as much market opportunity as possible. However, there are limits to how unprofitable a company can be before the market gets annoyed by its recurring losses.
From an operating margin perspective, SoundHound AI consistently spends about twice as much as it generates in revenue.
SOUN Operating Margin (Quarterly) data by YCharts
That's a major loss, and investors would like to see this operating margin start trending toward profitability.
If SoundHound AI can deliver strong revenue growth in 2026 and improve its operating margin, I have no doubt that the stock will deliver supercharged returns this year. However, if the market is unsure of SoundHound AI's success and is concerned about profits, the stock may struggle. SoundHound AI is a high-risk, high-reward stock, so investors should position themselves accordingly, but if it works out, it could deliver the incredible returns that investors are looking for.
