After a stock rises 800% in one year, most investors are skeptical that it can have another great year. I don't blame anyone for having this mindset, as it's difficult for a stock to continue rising at that pace for a sustainable time frame.
However, some of the tailwinds supporting SoundHound AI's (SOUN -16.44%) stock are undeniable, potentially making SoundHound an outlier. Even though it has risen more than 800% in the last year, some investors think that SoundHound is poised for more upside and will make a worthy investment even in 2025.
SoundHound's product line has expanded to different sectors
SoundHound AI is obviously an artificial intelligence (AI) business, but its approach to AI and the fields it targets makes it a unique player in the space. Generative AI models require a prompt to trigger a response. Generative AI models like ChatGPT or Gemini require inputs in the form of text. However, SoundHound's focus is on responding to audio input.
This isn't anything new. There have been attempts at digital assistants using audio inputs for over a decade now, whether those are in vehicles, a smart home device (Alexa), or a smartphone (Siri). However, you're likely left underwhelmed if you've used any of those products. SoundHound is looking to change that game, as many of the audio recognition technologies it implemented often outperform their human counterparts.
SoundHound's technology impressed Nvidia enough that it has become an investor, which further validates its technology. SoundHound has worked with Nvidia to load its software on GPUs intended for vehicles, so it does not require internet connectivity to interface with an AI model.
Automotive used to be a massive part of SoundHound's business, accounting for over 90% of revenue in Q3 2023. However, no single industry accounts for more than 25% of total revenue as of the third quarter of 2024, as other industries have started to adopt SoundHound's software. That's huge news, as the automotive market is large, but so are the restaurant, healthcare, insurance, and banking sectors.
This Q3 report also contained promising news, like revenue increasing 89% year over year to $25 million, but that's not what got investors excited.
The stock is very expensive, but its growth may justify its price tag
In SoundHound AI's conference call, management made the bold projection that its revenue would double in 2025. Additionally, it expects to reach EBITDA profitability by the end of 2025, which is a key milestone in achieving net income profitability. These projections ignited a massive run-up in SoundHound AI's stock, but is it still worth buying?
SOUN PS Ratio data by YCharts
At the time of writing, the stock traded for 94 times sales. Due to this high valuation, SoundHound AI's stock is extremely volatile, so this price tag could easily change from day to day. Regardless, 94 times sales is unbelievably expensive.
Most software companies trade between 10 and 20 times sales. But then again, most software companies aren't doubling their revenue from year to year. Should SoundHound double its revenue in 2025, this price tag would be cut in half if the stock price stays the same. That growth would still yield an expensive stock that trades at 47 times sales, and it's hard to imagine that the stock price is not moving at all. As a result, it's clear the market has baked in another significant revenue rise in 2026 (and perhaps 2027).
However, SoundHound already has some of that growth on the books. Management used to highlight revenue backlog when it was just starting to grow as a way to convince investors that growth was on the horizon. Now that it has real growth, it doesn't need to spotlight it as much. But on SoundHound's Q3 confernce call, management was asked about it. Its response was eye-opening, stating that the revenue backlog is well north of $1 billion. With 2025's revenue projected to be between $155 million and $175 million, it's quite clear that SoundHound's sales could double after 2025.
So, could SoundHound AI continue to rise in 2025? I'd say yes, but the company must report blowout figures each quarter. It has the business and backlog to do that, so it's not out of the question. However, with such high expectations already baked into SoundHound's stock, investors need to be careful and only invest what they are willing to lose with SoundHound, as the stock could get pummeled just as easily as it rose.
