Artificial intelligence (AI) investors are notorious for seeking stocks with maximum upside potential. They want the best stocks possible to capitalize on this generational revolution, and there are several that appear to be set to make a fortune for investors.
One of the more popular picks is SoundHound AI (SOUN 0.23%). It has huge upside potential for a few reasons, but it checks the most important box of all: size. It has a market cap of just $2.7 billion, so it could easily become a 10-bagger in a relatively short time frame if it sees serious top- and bottom-line growth.
Is it the ultimate pick for maximum upside among AI stocks? Or should investors be worried about it, considering that it's down 70% from the all-time high it touched in December 2024?
Image source: Getty Images.
SoundHound's stock got ahead of itself
With SoundHound's sell-off being so deep, many investors may be wondering if it's a failing company. I think the answer to that is a resounding "no." In the fourth quarter, its revenue rose 59% year over year to $55 million. It also reported several contract expansions with key clients and several new customer wins.
The company's technology combines audio recognition with generative AI, allowing its users to implement AI agents in real-world scenarios. The biggest application of this technology, so far, has been in the restaurant space, where clients use it to automate drive-thru service.
However, it's not hard to see the same technology that takes your order at a restaurant being deployed in a customer service setting at a financial institution, insurance company, or in healthcare. There is a huge market opportunity, and if SoundHound's technology can capture a meaningful piece of it, the stock could easily skyrocket.
NASDAQ: SOUN
Key Data Points
I think if it makes huge progress in these areas over the next few years, the stock could easily deliver the performance that investors are looking for. But why is it down so much right now?
After surging and then plunging in late 2024 and early 2025, SoundHound AI's stock again got way ahead of itself in the second half, reaching a 52-week high in mid-October. It then slumped hard.
Because the business isn't profitable yet, the best metric to use for valuing the stock is the price-to-sales ratio (P/S). Commonly, software companies trade in the neighborhood of 10 to 20 times sales, with the best ones being valued at around 30 times sales. At a minimum, you want to see such a company's growth rate be several times higher than its PS figure.
SoundHound AI reached 58 times sales in October and had peaked at a multiple above 100 at the end of 2024. Both of those were unreasonable valuations. Today, trading at around 16 times sales, I think it actually looks like a good deal.
SOUN PS Ratio data by YCharts.
The market was making unreasonable assumptions about the stock not too long ago. Now, the market is taking a more reasonable outlook. With that in mind, this could be an ideal time to buy SoundHound AI and stay patient regarding its AI progress.
