Is SoundHound AI Stock a Buy Now?

As we approach 2025, few stocks are generating as much excitement as SoundHound AI (SOUN 2.28%). In 2024, SoundHound AI saw an astonishing 836% increase, making it one of the standout stocks in the market. Not too long ago, its gains had exceeded 1,000%, but a market pullback at the year's end caused a slight dip in value.

The stock recently fell nearly 20% from its peak, prompting some investors to consider this drop as a potential buying opportunity. While there are risks associated with investing in SoundHound, this could be a moment to invest before the stock rises again.

SoundHound’s Technology is Gaining Traction

As an AI-focused company, SoundHound AI distinguishes itself by utilizing audio inputs instead of traditional text inputs. Many generative AI models require users to type in commands to generate responses, but SoundHound processes verbal commands. This is not entirely new technology, as we see this in digital assistants like Siri and Alexa, but previous versions often struggled to understand users accurately, leading to frustration and a lack of interest in the tech.

SoundHound, however, offers a more sophisticated product that frequently outshines traditional human counterparts in various situations. This advantage has led to its adoption across multiple industries. Notably, SoundHound’s solutions are being integrated into automotive digital assistants, restaurant drive-thru operations, mobile ordering systems, as well as banking and insurance services.

This broad usage significantly contributed to SoundHound’s stock surge towards the end of the year. In its Q3 earnings report, SoundHound revealed that 90% of its revenue originated from the automotive industry and that it once relied heavily on a single client for 72% of its earnings. Now, however, no single sector represents more than 25% of their total revenue, and its largest client accounts for just 12%. This diversification marks a critical step forward in SoundHound’s growth strategy.

SoundHound’s ambitions aren’t stopping there. Management projects substantial revenue growth for 2025, with estimates indicating revenues will reach between $155 million and $175 million—nearly double the $82 million to $85 million projected for 2024. This optimistic forecast has fueled investor interest and contributed to the share price increase at the end of 2024.

With audio input technology being a significant area of interest, if SoundHound solidifies its position as a leader in this field, it stands to achieve remarkable financial success. However, a question looms: has this potential success already been reflected in the current stock price?

Analyzing SoundHound's Growth versus Valuation

In Q3, SoundHound recorded an impressive 89% year-on-year revenue growth. While this is commendable, it is dwarfed by the phenomenal increase in stock price, resulting in an inflated valuation.

Currently, SoundHound’s stock trades at around 90 times its revenue, which is notably high. Typically, software companies are expected to trade closer to 20 times their revenue, a valuation that SoundHound established during the early part of the year. However, it’s important to remember that rare cases exist where software companies maintain extraordinary revenue growth over several years.

What level of success is already accounted for in the stock price? If SoundHound can indeed double its revenue in 2025 and 2026, it would quadruple its earnings and potentially reduce its valuation back to that more typical 20 times revenue—only if the stock price remains unchanged. This situation indicates how steep the expectations are for SoundHound’s future growth, but is it justified?

Should SoundHound achieve projected revenue of around $336 million by 2026, this number is still not out of line when compared to many other established software companies. Currently, Wall Street estimates SoundHound’s 2026 revenue at about $202 million, indicating skepticism about the company hitting its ambitious goals.

So, what should investors do? It may be wise to be patient and wait for further developments or consider opening a small position in SoundHound. This way, should the price increase, investors won’t miss out entirely, but if further declines occur, they can capitalize on the dip. SoundHound’s stock is heavily influenced by market hype, leading to potential volatility in price movements day to day. Investors should be prepared for this fluctuation, yet SoundHound’s promising product could significantly influence the market in the years ahead.

SoundHound, AI, Stock