SoundHound AI: Evaluating Investment Potential Ahead of Earnings
As major tech companies, known as hyperscalers, pour resources into artificial intelligence (AI), the focus also shifts to the important tools driving business efficiency. Companies like Meta (NASDAQ: META) and AppLovin (NASDAQ: APP) have shown remarkable improvements in advertising due to AI innovations.
Furthermore, AI speech recognition technology is gaining traction, particularly through SoundHound AI (NASDAQ: SOUN). Following a significant investment of $3.7 million from NVIDIA (NASDAQ: NVDA) in February, SoundHound’s stock saw a dramatic increase. With its next quarterly earnings report due on November 12, potential investors are asking: Is SoundHound a good buy before this announcement, and what does the long-term outlook look like for this stock?
Assessing SoundHound Before Earnings
To determine if investing in SoundHound AI before its earnings report is a sound decision, I consider four key factors. Initially, I look at the company’s record of exceeding its revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) forecasts.
The second factor is how the company has adjusted its revenue and adjusted EBITDA outlook compared to prior estimates. Thirdly, I analyze the stock price’s reaction to these results in the days following earnings. Finally, I review any recent developments that could lead to better-than-expected performance.
A Closer Look at SoundHound’s Earnings History and Upcoming Prospects
In 2023, SoundHound fell short of its midpoint revenue guidance by roughly $600,000 and did not achieve positive adjusted EBITDA in the fourth quarter. This led to a substantial share price drop of 33% over the following days. The company’s guidance remained unchanged from prior expectations. Conversely, in the first quarter of 2024, SoundHound surpassed revenue estimates by nearly 15%, although it significantly missed EBITDA expectations. Nonetheless, shares increased by about 12% after it raised its full-year revenue guidance by nearly 2%.
During the second quarter of 2024, SoundHound beat sales expectations by approximately 3% but fell short on EBITDA again. Notably, the company raised its 2024 revenue guidance beyond the previous high mark and boosted its guidance for 2025 by 50% to $150 million, mainly due to its acquisition of Amelia, which contributed around $45 million in annual revenue prior to the acquisition. Following this release, shares declined by 4% over three days. On average, the stock’s price reaction in the days following earnings announcements over the past four quarters has been around -7%.
Looking ahead, a partnership with MUSC Health, a prominent South Carolina hospital that generated over $8 billion in gross patient revenue in fiscal 2023, could enhance SoundHound’s earnings beyond expectations in the upcoming quarter. This contract, announced on August 28, creates a promising opportunity for revenue growth that was not initially forecasted.
Historically, investing in SoundHound prior to earnings carries a greater risk of price declines. However, the situation may differ this time. With a booking backlog of $723 million from the previous quarter, SoundHound has strong potential for future revenue. Analysts anticipate only $23 million in revenue for the next quarter. If some portions of the backlog convert into revenue sooner than expected, the company might outperform predictions. At this time, I maintain a neutral stance on purchasing SoundHound shares before earnings are released.
Long-Term Potential for SoundHound
The long-term outlook for SoundHound is significantly more promising. The company operates in a vast total addressable market (TAM), addressing applications in restaurant ordering, customer service, automotive communication, and the Internet of Things (IoT) landscape. Recently, five analysts released price targets for SoundHound, with an average target of $7.70 per share, indicating a potential rise of 43%. Notably, the most optimistic targets were issued in late September.
Despite its high valuation based on projected revenue, indicated by a forward price-to-sales ratio exceeding that of 95% of U.S. tech stocks, strong demand for AI voice recognition solutions supports this valuation. SoundHound’s recognition within sectors like healthcare and retail banking further expands its market applications. Therefore, I maintain a bullish outlook on SoundHound AI’s long-term potential.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
