I generally avoid sayings like "to the moon" regarding stocks. Aside from being amateurish, it gives people unrealistic expectations. Stocks may trade on hype and enthusiasm for a while, but they trade on fundamentals over the long haul. Just look at what happened in 2022 after many stocks blasted off in 2021. It wasn't pretty. Still, it's hard to argue with "to the moon" when a stock gains an incredible 835% in just one year, as is the case of SoundHound AI (SOUN -3.42%):
Congratulations if you owned this stock in 2024! The big question now is whether SoundHound can continue its rise in 2025. Let's look at what went right in 2024 and whether the stock is still an excellent buy.
Incredible technology
Artificial intelligence is a broad umbrella under which many technologies and dozens of companies operate. These include generative AI (like ChatGPT and Perplexity), autonomous driving, robotics, semiconductors, data centers, machine learning, and more. Speech recognition is another genre of AI that I firmly believe will become the standard, with automated ordering at drive-thru restaurants, AI-driven phone ordering and customer service, and advanced speech technology in automobiles.
According to Statista, the 2024 market size will more than double by 2030, reaching more than $16 billion:
Statista.
This is terrific news for SoundHound AI (SOUN -3.42%), whose conversational intelligence software is used by many customers in the restaurant and automobile industries. The company reported several recent customer wins like Church's Texas Chicken, Torchy's Tacos, and Jersey Mike's. Its customer base is now much more broad, with 12% of revenue in Q3 2024 from its largest customer, compared to 72% in the prior year. SoundHound also demonstrated its new in-vehicle voice assistant that enables users to order grub directly through the vehicle's communication system in January at the CES technology conference. The technology is incredible.
Improved fundamentals
SoundHound finished 2022 with just $9 million in cash on the balance sheet and more than $38 million in current liabilities. This is a difficult position, especially for a company that isn't profitable or producing positive cash flow from its operations. Things look much more positive today. The company reported $136 million in cash against $70 million in current liabilities in Q3 2024. Management righted the ship primarily by issuing more stock. This practice dilutes the existing shareholders, but I doubt many of them mind after the stock skyrocketed in price last year.
Revenue is also rising quickly, as shown below.
SOUN Revenue (TTM) data by YCharts
SoundHound reported $25 million in Q3 2024, bringing its twelve-month total to $67 million. But this is just the beginning of a massive sales ramp-up. Management has guided for up to $85 million in total sales for 2024 and $155 million to $175 million in 2025.
It's easy to see why investors are enthusiastic: the technology is impressive, the customer base is expanding leading to massive sales growth, and management has the company on solid financial footing. So, will the stock keep rising in 2025?
Is SoundHound stock a buy now?
Sometimes, it's difficult to focus on valuations when the market is entrenched in a long bull market. Today's market features the S&P 500 consistently making new all-time highs and tons of hype around AI. Much of the fervor is justified, but investors should still be cautious with high-valuation stocks.
After its dizzying rise, SoundHound's market cap is currently $5.9 billion. This means an investor today is paying about 69 times the company's 2024 sales forecast and 36 times the midpoint of this year's forecast. This is a steep price for any company, especially one not yet profitable, like SoundHound.
As mentioned above, sales in 2025 could double the 2024 total, but growth is expected to slow from there. Analysts estimate that 2026 sales will hit ~$200 million. This is still quality growth; however, it means that investors are shelling out nearly 30 times next year's sales for SoundHound at today's stock price. The stock could continue to rise; it's a terrific technology and quality company. Simply put, however, the massive gains of 2024 are unlikely to repeat. Investors should consider waiting for a pullback or dollar-cost averaging to mitigate the risk of this richly-valued stock.
