Picking the best-performing artificial intelligence (AI) stocks every year isn’t easy. That was the case in 2023 Nvidia. In 2024, all signs point towards Palantir Technologies. This shift from AI hardware to AI application software was predictable because it has to be deployed and become usable at some point before all the investment dollars in hardware pay off.
As a result, I think we’ll see another AI software company rise to the top in 2025. My prediction is that this will be the case SoundHound AI (NASDAQ: SOUND)even though it has already had an incredibly strong year in 2024, with an increase of more than 300%. How can a company that has already risen so much be a top pick for 2025?
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SoundHound AI’s platform aims to convert voice input into a prompt for an AI platform. This has multiple applications, including automotive manufacturing, restaurants, financial services, insurance and healthcare. The company already has products for these industries, and automakers and restaurants are among its biggest customers.
Still, by 2024 the company has become quite diversified. During the third quarter of last year, 72% of sales came from one customer and 90% of total sales came from the automotive sector. Now the largest customer contributed only 12% of sales, while the largest sector accounted for 25% of sales.
This diversification is an important part of SoundHound becoming more relevant across all sectors and growing into a more stable company. If that one customer were to leave at the end of 2023, the company might have gone bankrupt. If the biggest customer leaves now, it will still hurt, but not as much as before.
While SoundHound still poses risks, this plays a big role in lowering that level of risk.
In the third quarter, revenue grew 89% year over year to $25.1 million. This makes it a small-cap stock, as its revenue in the last twelve months totals $67 million. For other, more established software companies, that would be a fairly small percentage of total revenue, but the expectation is that the company won’t stay there for long.
Management project revenue for 2025 will be between $155 million and $175 million, which is almost double the revenue it expects for 2024. It is understood that SoundHound expects its business to continue its growth into 2025.
This also highlights an important investment point: how high is the limit if their products become the industry standard in audio recognition? Think of all the ways we use our voice to determine what we do; Now imagine this being associated with the power of AI. SoundHound could be a big winner in this area even after rising so much.
Perhaps the biggest risk with SoundHound is its valuation. Investors should be aware of the success already baked into the stock price. Its valuation works out to about 40 times sales, which is historically very expensive.
However, we also know that SoundHound’s current revenue over the next twelve months is expected to triple by the end of 2025 (if management’s expectations come true), which would price the stock in a more reasonable valuation range – somewhere around 20x the turnover. The problem is that the shares have to stay at the same price. If the company’s business continues to grow, the stock won’t stay put.
While I’m excited about 2025, it’s clear that all of that year’s financial growth has already been factored into the share price. As a result, the stock will take a nosedive if the company stumbles.
Still, I think there’s a significant tailwind in SoundHound’s favor, and I wouldn’t be surprised if management ends up exceeding 2025 expectations, as it has raised its expectations several times in 2024 (it was originally expected to turnover that year would be between $63 million and $63 million). and $77 million; current guidance is $82 million to $85 million).
If SoundHound AI forecasts that it will continue to double its revenue through 2026, I think this will keep the hype going in the stock, and be enough to propel it to become the best-performing AI stock in 2025.
Consider the following before purchasing shares in SoundHound AI:
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Keithen Drury has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Prediction: This Will Be the Best Performing Stock in Artificial Intelligence (AI) by 2025 Originally published by The Motley Fool
