Investing in emerging growth stocks can be incredibly rewarding. For instance, a $1,000 investment in ServiceNow when it went public in 2012 is worth more than $38,000 today, an incredible 3,770% gain. The work-flow specialist reported $244 million in sales in 2012 and $10.5 billion over the last 12 months.
On the other hand, growth stocks are riskier than established names. Electric-vehicle maker Lucid Group has lost 75% of its value since its initial public offering (IPO) and trades more than 95% off its high. The dichotomy is depicted below.
The lesson is to only put a small portion of your portfolio into speculative names and not all your eggs in one basket. For example, if you have $5,000 dedicated to emerging growth stocks, it may be wise to dedicate $1,000 to five different names. The figure will vary depending on the size of your portfolio and risk tolerance (take a risk tolerance quiz here!), but you get the idea.
SoundHound AI (SOUN -1.16%) is one company that's worth considering a $1,000 investment now using this strategy.
The case for SoundHound
Voice recognition will be a vast market in artificial intelligence (AI). Global revenue is expected to grow from $7 billion in 2024 to nearly $16 billion by 2030, as shown below.
Chart and data source: Statista.
Drive-thru and fast-casual restaurants, vehicles, smart ordering, customer service, and smart TVs are already using or will soon be using the technology. SoundHound's speech recognition software is already being used by popular brands like White Castle, Applebee's, Hyundai, Kia, and many others. The company also has 270 patents granted or pending that will protect its technological investments.
SoundHound's financial situation has improved significantly over the last few years. Last quarter, the company reported $200 million in cash on hand and no long-term debt -- quite an improvement over the beginning of 2023, when SoundHound had less than $10 million in cash and $35 million in debt.
Sales are heating up, as well. Revenue reached $13.5 million last quarter, a 54% year-over-year growth, and this is just the beginning. SoundHound is forecasting more than $80 million in sales for 2024 and $150 million in 2025. From 2020 to 2023, the company's sales increased by 54%, compounded annually, so the expected 88% increase from 2024 to 2025 represents a significant acceleration.
Is SoundHound stock a good buy?
This is where the risk discussed at the open comes in. While there's a lot to like about SoundHound, the company is unprofitable and has negative operating cash flow. This isn't unusual for a smaller, high-growth company. However, investors should consider this when determining the size of their investments.
Valuing companies like SoundHound is also tricky. There aren't any true comparables, and price-to-earnings ratios aren't helpful for companies with negative earnings. Right now, the stock is trading at 26 times sales, which is pretty high. However, this drops to 12.5, based on 2025's $150 million sales forecast, which is reasonable considering the company's tremendous growth potential.
Wall Street is also bullish. Six of seven analysts have "buy" or "strong buy" recommendations and an average price target of $7.79. This is 50% above the current share price.
Picking winning growth stocks is difficult. There's no guarantee that SoundHound will be a smashing success, but the ingredients are there. It has adequate cash reserves, patent-protected technology, high-profile customers, and skyrocketing sales. In my book, this makes it well worth a $1,000 investment.
