A tiny company in a fast-growing industry is a recipe for millionaire-making potential. And with shares up by a whopping 347% year to date as of this writing, SoundHound AI (SOUN -1.16%) has been a top performer as it seeks to pioneer voice-based artificial intelligence (AI).
But is it too late for new investors to hop aboard? Let's dig deeper to see what the future holds.
The artificial intelligence gold rush
Analysts remain optimistic about the AI industry's long-term potential. Bloomberg believes the revenue opportunity could grow at a compound annual growth rate (GACR) of 42% to $1.3 trillion by 2032. This projection assumes that the capital expenditures being poured into AI training hardware will set the stage for the adoption of software solutions that make life easier for businesses and their consumers.
SoundHound AI could play a role in this transition through its voice-AI platform, designed to allow clients to create conservational experiences for their users. The technology has clear applications in customer service, restaurant drive-thrus, and automotive assistants. And the company has inked agreements with major industry players like global automaker Stellantis, which will integrate SoundHound AI's voice assistant in several of its brands.
Voice recognition software is nothing new. And SoundHound AI won't be the only company combining this technology with large language models (LLMs) behind platforms like ChatGPT. With that in mind, scaling up quickly could be the key to building an economic moat. As a larger company, SoundHound AI would likely have more client relationships and more data to improve its software.
Impressive operational momentum
Arguably, the most important ingredient in a millionaire-maker stock is growth, and SoundHound AI has this in spades. Third-quarter revenue soared 89% year over year to $25.1 million as the company added new clients in the restaurant, healthcare, and finance industries.
Acquisitions seem to be a big part of management's expansion strategy. And in the quarter, SoundHound AI closed the $80 million buyout of Amelia, the maker of a customizable AI agent for back-office tasks like employee onboarding. The deal gives SoundHound AI access to Amelia's clients, which include high-profile names like BNP Paribas, Teva Pharmaceuticals, and Fujitsu, and the deal could add $45 million of sales in 2025.
That said, SoundHound AI is not without its challenges. Like many growth-oriented companies, it is far from profitability, with operating losses more than doubling to $33.7 million in the period. The good news is that, as a software-as-a-service (SaaS) provider, SoundHound AI's business model tends to have better margins than businesses that sell physical products.
Image source: Getty Images.
In the third quarter, the company generated a gross profit of $15 million (gross margin of 49%), giving it a pathway to scale into operating profitably by maintaining growth while keeping overhead costs (like advertising and research) under control. It also boasts $136.4 million in cash and equivalents on its balance sheet, allowing it to sustain its current cash burn for several more quarters without needing outside capital.
Is SoundHound AI still a buy?
SoundHound AI has two of the most important factors that give a stock multi-bagger potential: small size (with a market cap of $2.9 billion) and a huge addressable market. That said, the company's shares have already tripled this year, giving it a price-to-sales (P/S) multiple of 42. That's 13 times the S&P 500 average of 3.15.
However, while shares trade for a huge premium, SoundHound AI could grow into its valuation if it maintains or accelerates the type of growth seen in the third quarter. The stock looks like a long-term winner, but investors might want to wait for a pullback before buying shares.
