The growing demand for SoundHound’s AI voice solutions could result in more upside.
Shares of SoundHound AI (SOUN -0.20%) have crushed the broad market in the past year with stunning gains of almost 170%, despite witnessing a lot of volatility. Investors have been buying this small-cap company hand over fist to take advantage of the growing demand for voice-based artificial intelligence (AI) solutions.
But SoundHound stock really took off earlier this year after Nvidia revealed a small stake in the company, which has carved out a niche in the voice AI market despite its small size. But should investors continue to hold the stock in anticipation of more gains over the next year, even though it’s trading at an expensive valuation?
Let’s find out.
SoundHound AI’s latest results tell us its rapid growth is sustainable
SoundHound released its second-quarter results on Aug. 8. Revenue shot up 54% year over year to $13.5 million, beating the consensus estimate of $13.1 million. The adjusted loss per share fell to $0.04 from $0.07 in the same quarter last year.
The company — whose voice solutions are used by businesses in customer-service areas such as restaurant ordering, and by automakers to develop chatbots and conversational AI assistants — witnessed strong growth in demand once again last quarter. Its SoundHound Chat AI voice assistant is now being deployed by six brands of the automaker Stellantis.
A U.S.-based electric vehicle (EV) manufacturer will also start deploying SoundHound’s voice assistant across its entire fleet very soon. It’s also gaining a foothold with automakers in Latin America and Europe, not to mention various restaurants and food ordering platforms.
All this explains why the company’s revenue pipeline increased faster than its top line last quarter. It finished the period with a cumulative subscriptions and bookings backlog of $723 million, almost double year over year. The bookings backlog includes committed customer contracts, while the subscriptions backlog is the potential revenue it could achieve from its current customers.
There is an element of uncertainty to this metric: There could be contract cancellations, or it might not achieve the revenue it anticipates from its current customers in the long run. But the company does point out that it makes “reasonable assumptions about adoption percentages” while calculating the backlog metric.
More importantly, SoundHound’s growth suggests it’s able to convert its strong pipeline into actual revenue. And the company has decided to further expand its opportunity in the voice AI market with the acquisition of Amelia for $80 million. The deal is meant to strengthen its presence in customer service, by helping to reach more customers in insurance, healthcare, retail, and financial services.
Management said Amelia will start contributing to its growth in the second half of 2024, and it now expects to clock more than $80 million in revenue this year, up from the prior range of $65 million to $77 million. For 2025, SoundHound expects sales to exceed $150 million, with Amelia contributing $45 million in recurring revenue alone.
All this indicates the stock could continue to remain a top investment in the coming year.
Analysts expect more upside over the next 12 months
According to six analysts covering SoundHound, the stock has a median 12-month price target of $7.00, a 36% jump from current levels. Five analysts rate it as a buy, while one has a hold rating. The company’s latest results hint that it could indeed live up to those expectations in the coming year.
However, investors should note SoundHound stock is trading at an expensive 26 times sales following its red-hot rally in the past year. And the company is not profitable yet. So, those looking to add this AI stock to their portfolios need to be prepared to pay a rich valuation.
The good part is SoundHound’s impressive growth could help it justify that premium, especially with the pending Amelia acquisition. Growth investors with a higher risk appetite can still consider it in anticipation of more upside.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
