SoundHound AI: Soaring Growth Raises Questions on Valuation
Expectations for growth this year are soaring for SoundHound AI (NASDAQ: SOUN). Last year, analysts anticipated just 30% revenue growth. However, this year, projections indicate that sales could nearly double. Despite some investors expressing concerns about shares being overpriced at 36 times sales, a closer look at the data offers a different perspective.
Justification for SoundHound AI’s Premium Valuation
As a dedicated player in the voice-driven artificial intelligence (AI) market, SoundHound AI stands to benefit significantly from increased AI spending. Analysts predict the voice AI market could exceed $40 billion by 2032, while SoundHound AI’s revenue was just $85 million last year.
Image source: Getty Images.
Even high-growth firms can face overvaluation risks, and SoundHound AI may be an example of this, with shares trading at 36.5 times trailing sales. This year, analysts expect sales to grow by approximately 96%, while next year’s projections suggest nearly 20% growth. SoundHound AI’s target markets are also expected to experience about 30% annual growth.
SOUN PS Ratio data by YCharts
Looking ahead, SoundHound AI could grow sales at a double-digit pace over the next five to 10 years, with potential annual growth reaching triple digits at times. Consequently, the initial 36.5 times sales ratio may not appear as costly. When factoring in anticipated growth over the next year, SoundHound AI trades at 21.9 times forward sales. With additional years at an expected top-line growth rate of 20% to 30%, the company’s valuation may start to seem reasonable.
Nevertheless, several risks remain. The company’s relatively small research and development budget may put it at a disadvantage against better-financed tech giants. Additionally, short-term fluctuations in growth expectations could significantly impact the stock price. However, investors willing to adopt a long-term perspective might find SoundHound AI’s shares less expensive than they appear.
Is Now the Right Time to Invest in SoundHound AI?
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Ryan Vanzo has no positions in any of the stocks mentioned. The Motley Fool has no positions in any of the stocks mentioned and adheres to a strict disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
