These days, you can't find an investment bank analyst who's not excited about a handful of artificial intelligence (AI) stocks. Since ChatGPT exploded in popularity in late 2022, businesses of all sizes have been hurling money at new AI solutions with both hands to avoid getting left behind.
One stock that's benefited immensely from the AI revolution is SoundHound AI (NASDAQ: SOUN). Enterprise customers license its technology to support their voice-activated AI agents, which are like chatbots that can behave autonomously in a specific environment. From the end of 2023 through Dec. 22, the stock has shot 926% higher.
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However, what goes up often comes down, but H.C. Wainwright analyst Scott Buck thinks SoundHound stock has enough fuel in the tank to climb higher. On Dec. 23, he raised his bank's price target to $26 per share and maintained his buy rating. The new target implies a gain of 19.5% from SoundHound's closing price on Dec. 22.
Why Wall Street's bullish for SoundHound AI stock
Wall Street analysts are pounding the table on this stock because it's been pulling in new customers left and right. Around a year ago, SoundHound's customers were nearly all automobile manufacturers. Now, five industries -- auto, restaurants, financial services, healthcare, and insurance -- contribute between 5% and 25% of total revenue.
Third-quarter revenue soared 89% year over year, and actual usage of the voice-recognition services it sells is growing even faster than sales. The company delivered an annualized run rate of over 6 billion queries in the third quarter, a gain of more than 100% year over year.
SoundHound expects another big year in 2025. The midpoint of management's guidance ranges suggests revenue will grow 98% in 2025.
SoundHound lost $22 million in the third quarter, but profits on a GAAP basis could be coming in a couple of years. Management expects adjusted earnings before interest, taxes, depreciation, and amortization to turn positive in 2025.
Reasons to remain cautious
SoundHound says voice is becoming the preferred way for users to interact with their devices, but I don't know many people who aren't selling AI tools that agree. I have a whole drawer full of unplugged yet fully functional smart speakers, and it makes me nervous about this company's ability to maintain its sales trajectory.
SoundHound is also operating under the assumption that AI-powered customer service will become as necessary to all businesses as Wi-Fi and electricity. Adding a thicker layer of automation between customers and a real person who can help them is the sort of solution that only makes sense to managers eager to lower payroll expenses.
I'm worried that SoundHound's upward growth trajectory will flatten out in a year or two as fear of missing out on the AI revolution subsides. This would be a disaster for investors who buy the stock at recent prices because expectations are extremely high.
SoundHound AI stock has been trading for 91.5 times trailing sales. With expectations this high, investors who buy at recent prices could suffer heavy losses if the revenue guidance management issues next year isn't equally impressive.
Finally, SoundHound AI probably doesn't have an economic moat to keep competition at bay. Sooner or later, a competitor offering AI agent support that's good enough for SoundHound's clients could gain a large share of the market for voice-driven AI agent technology.
A buy now?
Sooner or later, I'll have a good experience with a voice-driven AI agent. Until that day comes, I'm going to avoid SoundHound stock.
If you're more confident than I am about the future adoption of voice-driven AI agents and you have a high risk tolerance, this could be a stock to consider buying. As a multiple of sales, it's expensive, but its market cap is a modest $7.4 billion at recent prices.
The overall market for AI agents is expected to rise from a value of about $5.1 billion this year to $47.1 billion by 2030, according to research from Markets and Markets. If you believe voice-activated agents are going to be the most popular type of AI agent in the years ahead, adding shares of this stock to a diversified portfolio could be the right move.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.
