SoundHound AI exploits a rapidly expanding artificial intelligence opportunity.
There are many growth stocks available for investors, many of them trying to ride the massive wave of artificial intelligence popularity. How to make a smart decision when choosing one?
You need to look at the long-term opportunities of a company, its recent growth, and be clear about its risks.
One such stock that seems like a smart place to put $500 right now is the voice assistant company SoundHound AI (SOUND 5.16%). Here’s how the company is set up.
What SoundHound AI does
SoundHound AI developed voice recognition software long before AI became the next big thing, and has over two decades of experience in this space. In a nutshell, the company’s software helps businesses better serve customers using conversational AI in sectors including restaurants, in-car infotainment, smart devices, hospitality and call centers.
Image source: Getty Images.
In practical terms, restaurants can use SoundHound’s AI tools to take reservations and allow customers to order over the phone or at a drive-thru. Its technology also gives car owners an easy way to interact with their in-car infotainment systems, hands-free. And the company’s speech recognition tools have already attracted the attention of large companies and are used by Qualcomm, Chipotle Mexican Grilland in Stellarcar brands.
If you need more proof that SoundHound AI technology goes beyond the AI hype, Nvidia invested in the company earlier this year and uses SoundHound AI voice assistant software in its Nvidia Drive driver assistance system.
In addition to its core markets, the company recently made a big move to expand into other industries with its $80 million purchase of a company called Amelia. The acquisition gives SoundHound AI a larger footprint in AI conversational services for insurance, financial services, healthcare and retail.
Opportunities and risks of SoundHound AI
Shares of SoundHound AI have risen 196% over the past 12 months as investors have become increasingly optimistic about the company’s prospects.
Part of that optimism comes from the company’s recent second-quarter results (which ended Aug. 8), in which sales jumped 54% to $13.5 million. That increase, along with the acquisition of Amelia, has led SoundHound AI management to estimate that full-year sales will reach $80 million, up 74% by 2023.
The company’s management estimates that sales will expand to $150 million by the end of 2025 — more than 3x SoundHound AI’s 2023 revenue. Management believes SoundHound AI’s growth potential stems from growth in company spending over the coming years, with McKinsey estimating generative AI spending in a range between $175 billion and $250 billion for 2027.
As with any growth stock, there are some risks to buying SoundHound AI. First, competition is fierce in the tech sector, and a slew of other conversational AI companies could be a threat. But perhaps the biggest risk is that the company is not yet profitable.
SoundHound AI’s generally accepted accounting principles (GAAP) net loss in the second quarter was $37.3 million, larger than its loss of $27.3 million in the year-ago quarter.
Investors want to see losses narrowed in the near future and should keep a close eye on whether the company moves in that direction or not. Some good news on this front is that some analysts estimate that SoundHound AI’s loss per share will be $0.34 in 2024 and narrow to a loss of $0.20 in 2025.
Why SoundHound AI is a buy now
I think SoundHound AI stock might be a smart place to put $500 right now because the company’s technology has already proven itself as an indispensable feature among large businesses, and it continues to build on that foundation. Plus, its Amelia acquisition is already adding to the company’s top line, and the expansion it brings into new industries could pay off for years.
With major companies such as Stellantis, Nvidia and Qualcomm already using the technology and more companies investing in AI technology than ever before, SoundHound AI is well positioned to tap into markets where voice assistants are a must, but where companies do not have the time or skills to develop their own.
Shares of SoundHound AI currently have a price-to-sales ratio of 26, which means it’s not exactly cheap. Investors can probably expect some volatility with the stock, but putting $500 into SoundHound AI right now could end up being a smart buy as AI-enabled voice assistants permeate everything from food ordering to infotainment systems in car
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chipotle Mexican Grill, Nvidia and Qualcomm. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.