Discover out why SoundHound AI is likely to be your subsequent high inventory choose. It is arduous to seek out undervalued shares within the red-hot AI market however this one would possibly deserve that tempting description.
SoundHound AI (SOUN -1.00%) has had fairly the roller-coaster journey this yr. However there’s extra pleasure forward, and I say it is time to buckle up for the following climb.
Regardless of its adverse earnings and eyebrow-raising valuation ratios, SoundHound AI stands out as a diamond within the tough. The voice-control specialist’s inventory is presently down by a major margin from its earlier highs, however do not let that discourage you. Here is why I see an enormous future for this little synthetic intelligence (AI) powerhouse, and why I would nonetheless name it “undervalued” right now.
A better take a look at SoundHound AI
SoundHound AI focuses on voice AI and conversational intelligence applied sciences, fields which might be turning into more and more important in our tech-driven world. With a backlog of long-term contracts totaling a whopping $682 million, this firm has a transparent path to future earnings that appears largely ignored by the present market value.
Sure, the inventory has greater than doubled from early February, when AI large Nvidia (NVDA -0.36%) introduced a small funding in SoundHound AI inventory. However it stands far beneath the almost $14 peak value recorded shortly after the preliminary public providing (IPO) within the inflation-burdened spring of 2022.
The market buzz round Nvidia’s funding was greater than hype, by the best way. It was a nod from a confirmed tech large recognizing SoundHound AI’s long-term potential. Whereas the inventory has since cooled off, the corporate’s fundamentals are something however frosty.
Monetary metrics and progress prospects
Regardless of its present unprofitability and excessive valuation ratios, SoundHound AI’s monetary well being stays sturdy. The order backlog talked about above quantities to just about $700 million as of Q1 2024, up from $336 million within the year-ago interval. This backlog displays dedicated consumer contracts and life like adoption estimates for subscription providers, offering a strong basis for future income.
A skyrocketing stability on this column means that buyer curiosity for SoundHound AI’s providers is excessive and rising, and the backlog ought to convert into revenues over time. The inventory is value about 1.9 instances that backlog right now.
Evaluating backlog to price-to-sales ratios may be deceptive as a result of backlog represents future potential income, whereas price-to-sales is predicated on present income.
So it is not a wholly truthful apples-to-apples comparability to price-to-sales figures, the place this inventory appears to be like costly with a 25.5x a number of — it ought to take years to finish the revenue-generating providers. Nonetheless, most progress shares would promote their proverbial moms for a backlog like that.
Furthermore, SoundHound’s comes with a strong monetary base. With a money stability of $180 million and solely $85.5 million of long-term debt, SoundHound is well-equipped to proceed its progress trajectory. This strong basis is essential to the hypergrowth part of a hungry upstart, permitting the corporate to take bottom-line losses whereas optimizing its top-line progress trajectory. In different phrases, that large order backlog would not be what it’s with out SoundHound AI’s willingness to finance this enterprise stage by debt papers and open-market inventory gross sales.
Positioned for long-term progress
SoundHound AI would possibly look like a wild journey, however that is a part of its attraction. Positive, the inventory has taken some steep dives, however the fundamentals paint a promising image. The corporate’s backlog of long-term contracts is substantial, and its strategic strikes have positioned it effectively for future progress.
Traders ought to be ready for a bumpy journey, however the potential rewards ought to be definitely worth the uncomfortable journey. SoundHound AI’s modern expertise, coupled with its spectacular backlog, means that this progress story is simply getting began — almost 20 years after the corporate’s founding.
For these prepared to embrace a bit of pleasure and maintain on by the twists and turns, SoundHound AI might be the ticket to market-beating returns. It is not a basic worth inventory, but it surely’s arduous to discover a higher purchase within the overheated AI sector proper now. I would definitely purchase SoundHound AI inventory lengthy earlier than doubling down on Nvidia’s lofty valuation.
Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Idiot has positions in and recommends Nvidia. The Motley Idiot has a disclosure coverage.
