SoundHound Stock Surged Nearly 340%
SoundHound AI, Inc. (NASDAQ:SOUN) is a $2.7B market cap company focusing on voice AI. The company believes its proprietary technology affords SoundHound substantial opportunities into an estimated TAM (across various verticals) worth more than $160B by 2026. Given SoundHound's FY23 revenue of just $46M, I'm not surprised that AI investors have attempted to chase its upside potential. Accordingly, SoundHound AI has surged nearly 340% over the past year, easily eclipsing the S&P 500 (SPX) (SPY) performance. As a result of SOUN's remarkable recovery, the stock re-tested highs last seen in May 2022, hovering below the $9 level as of this week's trading. While SOUN's significant upside is seemingly attractive, given its massive TAM, nearly 70% of its float is in the hands of the retail public. With institutional investors accounting for less than 20% of its outstanding shares, I assessed that SOUN could be vulnerable to significant volatility if its execution falters over the next two years.
Notwithstanding its recovery over the past year, much of the upside was only captured since early February 2024. SoundHound reported its fourth-quarter earnings release in late February, telegraphing robust growth momentum. SoundHound management also provided insights into SOUN's FY25 outlook, corroborating the sustainable strength of its near-term monetization drivers. Notably, SOUN has surged more than 500% from its February lows through this week's highs as AI investors piled into the stock. Therefore, earlier dip buyers likely anticipated SoundHound's robust release and forward guidance, getting in earlier before the market realized its potential.
SoundHound Provides Visibility Through 2025
SoundHound investors should recall that the company notched revenue growth of almost 50% in FY23. Notably, the company believes SoundHound's revenue could reach the $100M mark by 2025, indicating a potential 2Y CAGR of 48%. Moreover, SoundHound underscored its confidence in achieving "positive adjusted EBITDA in 2025." Therefore, I assessed that the market was satisfied with the profitability trajectory of SoundHound's market-leading growth potential despite its current losses.
Investors new to SoundHound's business model shouldn't find its value proposition complicated. It has accrued revenue from the automotive pillar but has expanded its influence on the restaurant industry. Management also lifted investor sentiments by alluding to its licensing partnership with a "preeminent AI chip company," which delivered "a notable, first-of-its-kind revenue contribution in Q4." With the reported linkages to Nvidia (NVDA), I believe SoundHound has astutely capitalized on the AI fervor, underpinning the significance of its voice AI technological advancements.
Also, management provided significant visibility into its growing backlog, attempting to justify the recent AI hype on SOUN. Accordingly, SoundHound indicated a cumulative booking backlog of $342M in November 2023. Management updated in its Q4 earnings release that the metric has reached $661M, "representing a remarkable 2x increase year-over-year." Consequently, it demonstrated the high scalability of SoundHound's AI solutions as it ramps the contribution from customers in the restaurant segment (second pillar).
With that in mind, SoundHound believes the company's medium-term guidance through FY25 has strengthened SoundHound's ability to meet its long-term model. As an application SaaS company, SoundHound thinks it can score a gross margin profile of more than 70% in the long run and convert it into an EBIT margin profile of more than 30%.
Is SOUN Overvalued?
Seeking Alpha Quant assigned SOUN a pretty reasonable "C+" valuation grade. The rating seems a fair assessment, considering its potential growth opportunities. Its "A+" momentum grade suggests that AI investors have jumped on SOUN's bandwagon but could potentially reach unsustainable FOMO levels. Furthermore, SOUN's "F" profitability grade might not attract the participation of investors keen on profitable growth. As a result, SoundHound's bullish thesis could prove to be speculative at the moment, behooving investors to exercise significant caution.
Is SOUN Stock A Buy, Sell, Or Hold?
I believe investors must consider whether SoundHound's value proposition can provide a sustainable moat against the incursions of big tech companies. These leading players have significant resources to integrate proprietary voice AI systems into their ecosystem. However, SoundHound's thesis of rapidly expanding its revenue streams across various verticals should mitigate its existential risks, although product stickiness is still not proven. Therefore, assigning SOUN a sustainable moat against more intense competition from other AI companies or big tech could be unrealistic.
With SOUN not rated at a steep growth premium at the current levels, I view the risk/reward as relatively well-balanced. However, SOUN's price action suggests downside volatility is anticipated, given the tremendous surge over the past month. Unless the company provides substantial downward revisions over its forward guidance moving ahead, I don't expect SOUN to revisit the lows it recorded in early February. As a result, a speculative buy opportunity on SOUN could appear if we get a meaningful digestion of its recent spike, followed by a more constructive consolidation at a level higher than its lows in February.
Rating: Initiate Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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