SoundHound AI (NASDAQ: SOUN) is a leading developer of conversational artificial intelligence (AI). Its stock came public in 2022, but it flew under the radar until February 2024, which is when Nvidia (NASDAQ: NVDA) revealed that it had acquired a small stake in the company.
SoundHound stock quadrupled shortly after that news hit the wires, and it's now sitting on a tenfold gain for 2024 on the final trading day of the year.
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Nvidia's share purchase isn't the only thing behind the incredible gains. SoundHound is delivering solid operating results, and the company's most recent forecast suggests its revenue could double in 2025.
That's great news for investors, but there is one caveat: SoundHound stock is extremely expensive right now, and its valuation could be a barrier to further upside in the New Year. So where could the stock be in 12 months from now?
A leader in conversational AI
SoundHound's conversational AI technology is popular among quick-service restaurant chains, hospitality venues, and some of the world's largest automotive manufacturers, thanks to its ability to understand voice prompts and respond in kind.
SoundHound's AI applications are used in more than 10,000 restaurant locations to automate drive-through ordering, phone ordering, and even in-store ordering. Plus, restaurant workers can call upon SoundHound's employee-assist technology any time for instructions on how to make menu items, or for help with handling customer queries. Leading chains such as Chipotle, Krispy Kreme, and Papa John's are just some of the company's customers.
On the automotive side, SoundHound's Chat AI software allows brands to install voice assistants into their vehicles, so drivers can instantly access everything from sports scores to information on their upcoming flight. Giants such as Mercedes-Benz, Hyundai, and Stellantis, the parent company of Chrysler, Jeep, and Dodge, are some of SoundHound's top customers in this space.
SoundHound is quickly expanding into other industries, including financial services, healthcare, and insurance, thanks to its recent acquisition of Amelia. It's another AI specialist that allows businesses to create virtual agents to serve their customers and employees.
Ninety percent of SoundHound's revenue came from the automotive industry alone during the third quarter of 2023, but in the recent third quarter of 2024, ended Sept. 30, five different industries accounted for between 5% and 25% of its total revenue. That highlights how much Amelia helped SoundHound diversify its customer base.
Image source: Getty Images.
SoundHound's revenue is growing extremely fast
SoundHound generated a record $25.1 million in revenue during the third quarter. That was an 89% increase from the year-ago period, mostly thanks to the inclusion of Amelia's revenue for the first time. The strong result prompted management to increase its revenue forecast for both 2024 and 2025.
The company now expects to bring in between $82 million and $85 million once this year is officially in the books, which would be an 82% increase over 2023 at the midpoint of the range. In 2025, SoundHound expects to generate between $155 million and $175 million in revenue, which would be a whopping 97% jump from 2024 at the midpoint of the range.
SoundHound told investors that its order backlog exceeded $1 billion at the end of Q3, which it expects to convert into revenue over the next six years. That figure doubled year over year, which bodes very well for the company's future sales growth.
However, SoundHound is losing significant amounts of money while it scales its business. It lost over $92 million on the basis of generally accepted accounting principles (GAAP) through the first three quarters of 2024 alone. Since the company has only $136 million in cash on hand, it can't afford to continue burning money at that pace.
SoundHound recently announced a new at-the-market equity facility, which enables it to issue new shares to investors to raise an additional $120 million as needed. While it will help to secure the company's future, it will also dilute existing shareholders. Plus, it's unclear whether a further $120 million will see the company to profitability, so it might require even more cash in the future.
SoundHound stock is extremely expensive following its incredible run
SoundHound's market capitalization has ballooned to $8.8 billion following the 1,051% increase in its stock this year. Based on its trailing-12-month revenue, that places the stock at a price-to-sales (P/S) ratio of 109.
For context, Nvidia stock trades at a P/S ratio of 30, which makes SoundHound stock three times as expensive. Considering Nvidia is on track to generate over $129 billion in revenue during its current fiscal year, is highly profitable, and has a stellar track record of success that spans decades, SoundHound's premium valuation is very difficult to justify.
SOUN PS Ratio data by YCharts
With that said, SoundHound's revenue is growing so quickly that its stock appears much cheaper even if we look just one year into the future. If we assume the company generates $175 million in revenue during 2025, the high-end of management's guidance, that places the stock at a forward P/S ratio of 50.3.
It's still one of the most expensive AI stocks in the market today even on a forward basis, so investors might have to hold on to it for two years or more before its valuation looks attractive. That opens the door to lots of uncertainty, because nobody truly knows what SoundHound's business will look like beyond management's forecast for 2025.
As a result, I think its lofty valuation could put a lid on further upside from here. In fact, I think it's entirely plausible that SoundHound stock loses ground in 2025, unless the company significantly boosts its revenue guidance throughout the year. Investors should be cautious buying it at the current price -- but if they do, they should be prepared to hold it for several years to maximize their chances of earning a positive return.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
