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Entering 2025, SoundHound AI (NASDAQ: SOUN) is facing significant challenges following a staggering 836% increase in stock value during 2024. The beginning of the new year has seen the company’s shares plummet by over 17%, with an earlier decrease reaching as much as 36% this month.
The dramatic decline raises questions, especially since there hasn’t been any specific news from the company to explain such a sharp downturn. Investors seeking opportunities in the AI stock market might be reconsidering whether now is the right time to acquire shares in SoundHound, given its rapid growth trajectory.
This article aims to evaluate whether SoundHound’s stock represents a wise investment choice after such a rocky start to the year.
In the previous year, the valuation of SoundHound escalated significantly, resulting in notable price-to-sales ratios. Currently, while analyzing its financials, it is essential to note that the company is not yet profitable. As such, the price-to-sales ratio is a useful metric. At the close of 2024, SoundHound’s sales multiple stood at 90, but the recent stock drop has reduced it to 74. Although an improvement, this ratio remains substantially higher than those of its peers, with the S&P 500 showing a ratio of 3.1 and the U.S. technology sector averaging 8.1.
Despite its inflated valuation, the company’s growth rates may lend credence to a bullish outlook. SoundHound forecasts revenue of $83.5 million for 2024, indicating a remarkable 82% increase over the previous year, which saw a 47% top-line growth. Looking ahead, projections for 2025 suggest revenues might reach $165 million, nearly doubling the anticipated growth.
Investors should also consider larger players in the AI space, such as Nvidia, which is reported to be expanding at a quicker rate than SoundHound and operates at a considerably lower price-to-sales ratio of 30. Furthermore, Nvidia’s forward earnings multiple of 32 positions it as a more attractive investment, especially given its leading role in the AI chip market, which enhances its profit margins alongside robust earnings growth.
The broader market for voice AI solutions, as highlighted by research firm Market.us, was valued around $2.4 billion in 2024 and is projected to grow at a compound annual growth rate (CAGR) of almost 35% through 2034, potentially reaching $47.5 billion by the end of this period.
While such expansion prospects suggest substantial growth potential for SoundHound AI, especially in the long term, its current valuation raises concern. For instance, if the company manages to achieve a CAGR of 40% through 2034, anticipated annual revenue could exceed $2 billion, but the valuation may diminish as market expectations adjust. If SoundHound were to trade at 8 times sales in a decade, its market capitalization might attain $16 billion, reflecting a 220% increase from current levels. However, translating this projection into annualized gains yields only about 12%, a return that pales in comparison to historical performance metrics from the Nasdaq-100 Technology Sector.
Compounding these valuation concerns, analysts at Yahoo! Finance have set a one-year price target of $12.36 for SoundHound, indicating that the stock might be overpriced following its impressive gains in 2024.
Amid these revelations, potential investors might find it prudent to explore other AI stocks that offer more favorable valuations and are poised to tap into expansive market opportunities.
Before making any investment decisions regarding SoundHound AI, it’s important to consider the following:
The Motley Fool Stock Advisor team has identified some of the 10 best stocks that investors should consider, and notably, SoundHound AI is not among them. The stocks featured have the potential to yield significant returns in the forthcoming years.
Reflecting on past performance, had you invested in Nvidia when it was highlighted in April 2005—with an initial investment of $1,000—you would now possess a valuation of $902,242!
It is essential to note that Stock Advisor boasts an impressive average return of 947%, significantly outperforming the S&P 500’s 178% return. Stay informed on their latest top selections.
*Stock Advisor returns as of January 21, 2025
Harsh Chauhan does not hold positions in any of the stocks discussed. The Motley Fool has investments in and recommends Nvidia, following its disclosure policy.
Is SoundHound AI Stock a Buy Now? was originally published by The Motley Fool.
Source
finance.yahoo.com