Is SoundHound AI Stock a Good Investment Right Now?

The artificial intelligence (AI) market is rapidly expanding, leading to significant price increases in many AI-focused stocks. One such stock that has recently attracted attention is SoundHound AI (SOUN).

In the past year, this stock has experienced an astonishing rise of 848% as of January 6. Part of this increase can be attributed to its popularity as a meme stock, while analyst firm H.C. Wainwright raised SoundHound's price target to $26 in December, further boosting investor interest.

With such a dramatic rise in stock value, potential investors may be asking whether now is a good time to buy shares in SoundHound. Analyzing the company's business model and recent developments can help answer this question.

Strategic Acquisitions by SoundHound

SoundHound leverages AI technology to create software that understands human speech in 25 different languages. This wide range allows the company to generate over half of its revenue from markets outside of the Americas during the first three quarters of 2024.

Historically, SoundHound derived more than 90% of its revenue from international sources, but this began to shift after the company made a series of strategic acquisitions. These acquisitions led to a staggering 963% increase in sales within the Americas over the first nine months of the previous year.

Key acquisitions include SYNQ3, a voice AI company tailored to the restaurant sector, and Amelia, which expanded SoundHound's reach into sectors such as financial services and healthcare.

As a result of these strategic moves, SoundHound reported a record revenue of $25.1 million, marking an 89% increase year-over-year in the third quarter. Subsequently, the company raised its guidance for full-year sales in 2024 from a minimum expected revenue of $63 million to $82 million, with projected revenue for 2025 ranging between $155 million and $175 million.

Additionally, these acquisitions have allowed SoundHound to diversify its customer base. Previously, 72% of the revenue came from a single customer, but this figure dropped to 12% by the end of Q3.

The company also boasts a strong balance sheet, exiting Q3 with total assets of $499.7 million, $135.6 million of which is in cash and equivalents, against total liabilities of $203.7 million.

Challenges for SoundHound

Despite gaining from its acquisitions, there are challenges to consider. The new businesses have contributed to a decrease in SoundHound's gross profit margin.

In Q3, the company's gross profit margin fell to 49%, down from 73% in the previous year. Management has indicated that margins are expected to improve over time as the integration of these acquisitions yields cost synergies.

It's important to note that SoundHound is currently operating at a loss. The company reported a net loss of $21.8 million at the end of Q3. As long as sales continue to grow, the lack of profit is not necessarily a major concern.

Many technology firms prioritize growth over immediate profitability, and SoundHound appears to be following this trend.

Overall, SoundHound's position has improved over the past year. Reducing dependency on a single client is an essential step for long-term stability. Furthermore, the company has successfully diversified its revenue sources beyond the automotive sector, which previously accounted for 90% of its earnings.

Should You Buy SoundHound Stock Now?

SoundHound is strategically positioned to benefit from the growth of the AI market. Predictions indicate that the AI sector will grow to $244 billion by 2025 and reach $827 billion by 2030.

This potential makes SoundHound an attractive investment option, but is it the right time to buy, especially with stock values down from a 52-week high of $24.98 reached on December 26?

To assess, we can take a look at SoundHound's price-to-sales (P/S) ratio, an indicator of how much investors are willing to pay for a dollar of revenue.

Current data shows that SoundHound's P/S ratio is considerably higher than its historical averages, suggesting that the stock may be overvalued at this point.

In conclusion, while SoundHound AI is a promising company within a growing industry, it may be prudent to wait for a potential drop in stock price before making a purchase.

Note: The information provided is for educational purposes and reflects the author's analysis as of now.

SoundHound, AI, Stock