I generally avoid phrases like "going to the moon" when I talk about stocks. Such terminology gives potential investors unrealistic expectations. Stocks can trade on hype and enthusiasm for a while, but over the long haul, their performance is more often tied to fundamentals. Just look at what happened in 2022 after many stocks blasted off in 2021. The trip back down to earth wasn't pretty. Still, it's hard to argue against "going to the moon" after a stock gains an incredible 835% in just one year, as was the case with SoundHound AI (SOUN -1.69%) in 2024.
2025 hasn't been nearly as friendly for reasons I'll address below. The stock is 46% off its 2024 all-time high, but it is still more than 500% higher than at the beginning of 2024. SoundHound investors have been on a roller coaster since the stock's IPO in 2022. The stock initially rose swiftly before being crushed by the 2022 tech dive due to some financial question marks. The stock closed at a low of just $0.97 a share in late December 2022.
Investors on the SoundHound roller coaster or considering hopping aboard are wondering whether SoundHound AI can reverse its recent downturn and return to 2024 levels. Let's examine what went right for the company in 2024 and whether the stock is a good buy now.
SoundHound AI benefits from incredible technology
Artificial intelligence (AI) is a broad umbrella under which many technologies and dozens of companies operate. AI encompasses generative AI (like that offered by ChatGPT and Perplexity), autonomous driving, robotics, semiconductors, data centers, and machine learning. Speech recognition is another subset of AI that is being put to more mainstream use these days, proliferating in applications such as automated ordering at drive-thru restaurants, AI-driven phone ordering and customer service, and advanced speech technology in automobiles.
According to Statista, by 2030, the market size for speech recognition technology will more than double from its 2024 value to more than $16 billion.
Image Source: Statista.
This is terrific news for SoundHound AI (SOUN -1.69%), whose conversational intelligence software is used by many customers in the restaurant and automobile industries. The company has added several significant new customers in recent months, including Church's Texas Chicken and Torchy's Tacos. Its client base is now much more broad -- just 12% of revenue in Q3 2024 came from its largest customer, compared to 72% in the prior-year period. And at CES in Las Vegas this month, SoundHound also demonstrated a new feature of its in-vehicle voice assistant that enables users to command their vehicle's communication system to order takeout for them. The technology is incredible.
SoundHound's business is showing improved fundamentals
SoundHound AI finished 2022 with just $9 million in cash on its balance sheet and more than $38 million in current liabilities. That was a difficult position, especially for a company that wasn't profitable or producing positive cash flow from its operations. Things look much more positive today. As of the end of Q3 2024, it had $136 million in cash against $70 million in current liabilities. Management righted the ship primarily by issuing more stock. That diluted existing shareholders, but I doubt many of them mind given how much the stock skyrocketed last year.
Revenue is also rising quickly.
Data by YCharts.
SoundHound reported $25 million in revenue in Q3 2024, bringing its 12-month total to $67 million. But the company is just at the beginning of a massive sales ramp-up. Management is guiding for up to $85 million in total sales for 2024 and between $155 million and $175 million in 2025.
It's easy to see why investors have been enthusiastic: The technology is impressive, the expanding customer base is leading to massive sales growth, and management has the company on a solid financial footing. So, will the stock have another positive run 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 regularly making new all-time highs, and there's a ton of hype around AI. Much of the fervor is justified, but investors should still be cautious with high-valuation stocks.
After its dizzying rise in 2024, SoundHound's market cap is currently $5.2 billion. This means an investor today is paying about 64 times the company's 2024 sales forecast and 36 times the midpoint of 2025's forecast. This is a steep price for any company, especially one that is not yet profitable. Historically, the stock has traded for an average of 20 times sales, which is more palatable. This would value the company at $3.3 billion based on the midpoint of the 2025 sales guidance, implying another 35% decline in its current share price. This could happen soon, given the current trajectory.
As mentioned above, sales in 2025 could double the 2024 total, but growth is expected to slow from there. Analysts estimate that its sales will hit approximately $200 million in 2026. 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. SoundHound has terrific technology and excellent growth. Simply put, however, the massive gains of 2024 are unlikely to repeat. Investors should consider waiting for the stock to reach a more reasonable valuation.
