SoundHound AI (NASDAQ: SOUND) has had quite a rollercoaster ride this year. But there’s more excitement ahead, and I say it’s time to buckle up for the next climb.
Despite the negative earnings and eyebrow-raising valuation ratios, SoundHound AI stands out like a diamond in the rough. Shares of the voice control specialist are currently down significantly from previous highs, but don’t let that discourage you. Here’s why I see a big future for this little artificial intelligence (AI) powerhouse, and why I’d still call it “undervalued” today.
A Closer Look at SoundHound AI
SoundHound AI focuses on voice AI and conversational intelligence technologies, fields that are becoming increasingly important in our technology-driven world. With a backlog of long-term contracts totaling a whopping $682 million, the company has a clear path to future revenue that seems largely ignored by its current market price.
Yes, the shares have more than doubled since early February, when the AI giant Nvidia (NASDAQ: NVDA) announced a small investment in SoundHound AI stock. But it’s well below the peak price of nearly $14 recorded shortly after its initial public offering (IPO) in the inflation-ridden spring of 2022.
The market hype surrounding Nvidia’s investment was more than just hype. It was a nod from a proven tech giant that recognized SoundHound AI’s long-term potential. Although the stock has since cooled, the company’s fundamentals are anything but icy.
Financial statistics and growth prospects
Despite current unprofitability and high valuation ratios, SoundHound AI’s financial health remains robust. The order book mentioned above amounts to almost $700 million as of the first quarter of 2024, compared to $336 million in the same period a year ago. This backlog reflects committed customer contracts and realistic estimates of subscription service adoption, creating a solid foundation for future revenues.
A sky-high balance sheet in this column suggests that customer interest in SoundHound AI’s services is high and growing, and that the backlog should generate revenue over time. The stock is worth about 1.9x the backlog today.
Comparing backlog to price-to-sales ratios can be misleading because backlog represents future potential revenue, while price-to-sales is based on current revenue.
So it’s not an entirely fair apples-to-apples comparison on price-to-earnings numbers, with this stock looking expensive at a 25.5x multiple — it would take years to complete its revenue-generating services. Yet most growth stocks would sell their proverbial mothers for that kind of shortfall.
In addition, SoundHound’s has a robust financial foundation. With a cash balance of $180 million and only $85.5 million in long-term debt, SoundHound is well equipped to continue its growth trajectory. This solid foundation is crucial for a hungry startup’s hyper-growth phase, allowing the company to incur losses while optimizing its revenue growth. In other words, that massive backlog wouldn’t be what it is without SoundHound AI’s willingness to finance this phase of its business through debt and stock sales on the open market.
Positioned for long-term growth
SoundHound AI may seem like a wild ride, but that’s part of its charm. Sure, the stock has taken some steep dives, but the fundamentals paint a promising picture. The company’s backlog of long-term contracts is significant, and its strategic moves have positioned the company well for future growth.
Investors should prepare for a bumpy ride, but the potential rewards should be worth the uncomfortable ride. SoundHound AI’s innovative technology, coupled with its impressive backlog, suggests this growth story is just beginning—nearly two decades after the company was founded.
For those willing to embrace a little excitement and stick with the twists and turns, SoundHound AI could be the ticket to market-beating returns. It’s not a classic value stock, but it’s hard to find a better buy in the overheated AI sector right now. I’d definitely buy SoundHound AI stock long before I’d double down on Nvidia’s lofty valuation.
Should you invest $1,000 in SoundHound AI now?
Consider the following before purchasing shares in SoundHound AI:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had invested $1,000 at the time of our recommendation, you would have $757,001!*
Stock advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of June 24, 2024
Anders Bylund holds positions at Nvidia and SoundHound AI. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
SoundHound AI is the most undervalued artificial intelligence (AI) stock to buy now was originally published by The Motley Fool
