SoundHound AI: A Promising Contender for 2025’s Top AI Stock
Pinpointing the best artificial intelligence (AI) stock for the following year can be challenging. In 2023, Nvidia took the top spot, but many are now looking to Palantir Technologies for 2024. This shift from AI hardware to application software makes sense; the investment in hardware must translate into practical applications for the technology to succeed.
Looking ahead, I believe another AI software firm will emerge as a key player in 2025. My forecast is that SoundHound AI (NASDAQ: SOUN) will lead the pack, despite its impressive 300% growth in 2024. How can a company already seeing such success be a top pick for the next year?
SoundHound Expands Its Horizons in 2024
SoundHound AI specializes in converting voice input into prompts for AI applications, which serve various sectors including automotive, restaurants, finance, insurance, and healthcare. These industries are among its biggest clients.
However, 2024 has marked a significant diversification for the company. Last year, a staggering 72% of its revenue came from one client, while the automotive sector accounted for 90%. Now, its largest client contributes just 12% to overall revenue, with the largest sector comprising only 25%.
This diversification is crucial for SoundHound’s stability and relevance across multiple industries. If its principal client had exited in late 2023, it could have posed a severe threat to the company’s survival. Now, while losing its largest client would still be detrimental, it would not be as catastrophic.
Though risks remain for SoundHound, this diversification significantly mitigates them.
In the third quarter, the company’s revenue surged 89% year-over-year, reaching $25.1 million. SoundHound is categorized as a small-cap stock, with a total revenue of $67 million over the past year. This amount may seem modest compared to more established software companies, but projections indicate a robust future for SoundHound.
Management anticipates revenue for 2025 to fall between $155 million and $175 million, effectively doubling expectations for 2024. This indicates that SoundHound aims to continue its positive growth trajectory.
The prospect of SoundHound’s products becoming the industry standard for audio recognition raises exciting questions. Consider the ways voice commands are used today and pair that with advancing AI capabilities—SoundHound could become a formidable leader in this space, even after its rapid growth.
The Investment Challenge: SoundHound’s Valuation
The most pressing concern regarding SoundHound lies within its valuation. Investors must keenly assess the achievement already reflected in the stock’s current price, which approaches a daunting 40 times sales—a figure historically considered high.
SOUN PS ratio, data by YCharts; PS = price to sales.
However, if SoundHound’s past revenue tripled by the end of 2025, the stock could then be valued at a more reasonable 20 times sales. The caveat lies in the stock’s potential price stagnation; if demand remains strong, it’s unlikely that the stock will settle at its current levels.
While there is warranted excitement surrounding the growth of 2025, it must be noted that a significant portion of that potential is already included in the stock’s price. If business performance falters, investors could see a sharp decline in stock value.
Still, numerous positive factors support SoundHound’s vision. The company has revised its revenue guidance multiple times in 2024, indicating confidence in its performance (initial 2024 revenue projections of $63 million to $77 million were recently updated to $82 million to $85 million).
If SoundHound continues with ambitious revenue goals for 2026, it could further maintain momentum and potentially crown it as 2025’s top AI stock.
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*Stock Advisor returns as of December 2, 2024
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
