Why Analysts Are Bullish on SoundHound's Long-Term Growth Potential

The enthusiasm surrounding SoundHound AI, Inc. (SOUN) is palpable. With solid revenue growth and strategic collaborations underlining its long-term potential, the stock has gained immense traction among investors. In this piece, we will evaluate why analysts are bullish about SOUN’s growth prospects.

SoundHound is at the forefront of voice-based conversational AI technology, offering solutions that enable seamless interactions across numerous languages. Its AI system is deployed in various sectors, including customer service call centers, restaurant ordering platforms, and automotive systems. With a market cap of $1.62 billion, SOUN falls within the mid-cap category, making it an attractive option for investors seeking growth opportunities in the AI sector.

SOUN’s shares have delivered an outstanding performance, gaining nearly 150% year-to-date and more than 135% over the past three months. Excellent, isn’t it? Moreover, despite recent pullbacks, the stock is comfortably above its 200-day moving average of $3.05, indicating an upward trend.

SoundHound’s Strategic Partnerships and Acquisitions

On May 9, SOUN partnered with Perplexity, the conversational AI-powered answer engine. This partnership is geared toward enhancing voice assistant functionality across several devices, such as cars and IoT devices, by integrating online LLMs (Large Language Models), making it the most advanced voice assistant on the market.

Moreover, the company closed the previously announced acquisition of SYNQ3 Restaurant Solutions in the March quarter, becoming the largest provider of voice AI for restaurants in the U.S. With more than 10,000 signed locations and significantly more in the pipeline, this acquisition expands SOUN's presence in this sector.

Impressively, the restaurant segment now contributes approximately 30% of the company's total revenue, surpassing initial forecasts set for FY24 by a significant margin.

Additionally, SoundHound has forged collaborations with major brands such as Applebee’s and Church’s Chicken, augmenting its market presence and revenue streams. Furthermore, the company has secured agreements to integrate its voice assistant technology into the luxury vehicle lineup of a leading Asian electric car manufacturer and a major U.S.-based EV maker’s entire fleet later this year.

SOUN's partnership landscape remains vibrant, as demonstrated by its recent collaboration with NVIDIA Corporation (NVDA) on March 18, 2024. Under this partnership, the company would deliver in-vehicle voice-enabled generative AI responses that operate seamlessly without needing connectivity.

In light of these advancements, SOUN experienced a surge in demand for its voice AI solutions across the automotive and restaurant sectors. By securing significant brand partnerships, the company propels its growth trajectory and solidifies its position in the competitive conversational AI market.

Solid Financial Performance and Growth Outlook

In the first quarter that ended March 31, 2024, SOUN reported strong top-line performance, with a remarkable 73% year-over-year growth in revenues to $11.59 million, beating analyst expectations of $10.10 million. The company's three-pillar strategy, focusing on AI for customer service, in-car systems, and IoT devices, fueled its performance with notable expansions in its drive-thru AI service and Smart Ordering offering.

The company’s non-GAAP profit increased 56.8% year-over-year to $7.59 million. Meanwhile, its cumulative subscriptions and bookings backlog grew 80% to $682 million, driven by solid product royalties and a robust automotive segment. Moreover, it witnessed a 60% year-over-year increase in the annual run rate of queries, which was over 4 billion in the first quarter.

Keyvan Mohajer, CEO and Co-Founder of SoundHound AI remarked, “Voice AI is rapidly becoming indispensable for customer service, as evidenced by the growing demand for subscriptions.”

However, on the bottom line, the company continued to grapple with profitability issues, reporting a non-GAAP net loss of $19.88 million or $0.07 per share, alongside an adjusted EBITDA loss of $15.40 million.

Despite these setbacks, SOUN revised its full-year revenue guidance upward (on the lower end), projecting a range of $65 to $77 million. It also aims to achieve adjusted EBITDA profitability by 2025, where the company anticipates even greater growth, with revenue exceeding $100 million (more than double the $45.9 million it reported in 2023).

Mixed Analyst Expectations

Street expects SOUN to generate a revenue of $13.75 million for the second quarter (ending June 2024), indicating a 57.1% year-over-year increase. Yet, the company is expected to report a loss per share of $0.08 for the ongoing quarter.

Furthermore, for the fiscal years 2024 and 2025, analysts anticipate a revenue surge of 53.7% and 45.6% on a year-over-year basis, reaching $70.52 million and $103.35 million, respectively. However, earnings per share is predicted to remain in negative territory at least over the next two years.

Additionally, the company has surpassed consensus revenue estimates in three of the trailing four quarters, suggesting a strong likelihood of continuing its growth trajectory in the upcoming quarters.

Bottom Line

SOUN’s first quarter establishes the tone for 2024 as another year of solid growth for the company. The growing necessity of voice AI in customer services is reflected in the increasing demand for its subscription services. Leveraging over two decades of technology innovation and billions of customer interactions, SoundHound, as an AI company, excels in delivering top voice AI technology in the market.

Across automotive and customer service, renowned global brands are turning to the company for unparalleled experiences.

Wedbush analyst Daniel Ives reaffirmed an “Outperform” rating for SOUN, setting a price forecast of $9. After the first quarter results, the analyst stated that the company continues to witness robust demand for its voice AI products within the automotive and restaurant sectors. This growth is driven by securing major brand partnerships, thereby grabbing market share in the conversational AI market.

Also, analysts at Cantor Fitzgerald upgraded SOUN stock to “Neutral” from “Underweight.” In a separate development, Cantor Fitzgerald analyst Brett Knoblauch upgraded the stock from Sell to Hold.

Although the stock shows potential for growth driven by the booming interest in AI technologies, it is currently plagued by profitability issues. SOUN’s trailing-12-month EBITDA margin, net income margin, and levered FCF margin of negative 125.2%, negative 186.2%, and negative 58.2% compare to the industry averages of 9.82%, 2.48%, and 10.05%, respectively.

Looking at valuation, we believe that the stock is trading at a premium compared to its peers. SOUN’s forward EV/Sales of 23.05x is 715.4% higher than the industry average of 2.83x. Likewise, in terms of forward Price/Sales, the stock is trading at 24.74x, higher than the industry average of 2.88x.

Nevertheless, SoundHound AI's intrinsic value lies in its technological advancements and market positioning, particularly in conversational AI technologies.

Considering these factors, SOUN presents a potentially lucrative yet volatile investment profile. Therefore, investors should carefully monitor future earnings reports and corporate developments before making investment decisions.