2-for1 Sale
Let’s be honest. After the stunning launch of OpenAI’s ChatGPT in late 2022, the generative artificial intelligence (AI) industry has often been more hype than substance. While hardware makers like Nvidia (NASDAQ:NVDA) or Advanced Micro Devices (NASDAQ:AMD) have made tons of money selling the chips needed to run and train these complex algorithms, there have been conspicuously fewer profits on the consumer-facing software side of the opportunity.
SoundHound AI (NASDAQ: SOUN) could help change this dynamic with its industry-leading AI voice and speech recognition software, which is already attracting real-world use cases. Here’s how this growth story could unfold over the next five years and beyond.
What is SoundHound AI?
Founded in 2005 and going public through a special purpose acquisition company (SPAC) merger in 2022, SoundHound AI was in the right place at the right time to capitalize on AI-related hype. Before going public, it developed several audio-technology products, including in-car music and speech recognition software. Now, it can combine these platforms with large language models (LLMs) to create more value for consumers.
First-quarter 2024 revenue jumped 73% year over year to $11.6 million. That said, SoundHound is still unprofitable with an operating loss of $28.5 million in the period
The company currently spends more than its quarterly revenue on research and development ($14.9 million). While this outflow delays near-term profitability, it could help set the company up for future success.
What could the next 5 years have in store?
For investors, the most exciting thing about SoundHound’s software is its obvious real-world utility. Coupled with conversational LLMs, voice recognition software can easily replace human workers in fast-food drive-thrus and other restaurant applications. This disruption could happen relatively quickly, considering the technology’s rapid improvement.
In 2023, SoundHound inked an agreement with U.S. burger chain White Castle to bring AI-enabled ordering to over 100 locations by year-end. This has been followed by an aggressive acquisition spree involving the buyout of the AI customer service provider SYNQ3 and Allset, an online ordering platform designed to help restaurants bypass delivery apps.
Over the long term, SoundHound aims to create a synergistic ecosystem where consumers can order food and other items from their vehicles, phones, and smart devices without a third party. These acquisitions could help it gain the staff and technology to realize this vision.
Expect competition to rise
The biggest challenge for SoundHound, and perhaps AI software in general, will be the lack of an economic moat — which is a unique advantage that can separate a company from its rivals. While SoundHound may have established an early lead in voice-based AI technology, competition is sure to follow. And this could hurt the company’s growth potential and margins.
The good news is that as an early mover, SoundHound could establish brand recognition and network effects to keep itself ahead of new rivals. The company is also partially backed by leading AI chip maker Nvidia, which bought $3.7 million worth of its stock in February. While this purchase is relatively small, it is a vote of confidence in SoundHound and could signal future collaboration between the two companies.
Is SoundHound stock a buy?
With a price-to-sales (P/S) multiple of around 24, SoundHound stock is not cheap. For context, the S&P 500 index averages a P/S of around 3. That said, SoundHound isn’t the average company — it is an innovative software stock targeting a new and disruptive industry. And its valuation is in line with other AI companies like Nvidia, which boasts a P/S of 32.
Often, you get what you pay for in the stock market. And companies with big potential usually trade for a premium. SoundHound stock looks capable of outperforming over the next five years and beyond.
