Despite the Rally, Why Is This AI Stock Under $10 Still A Great Buy?

The artificial intelligence (AI) fire that's been fueling markets higher may have slowed, but it still burns brightly. While the top AI players receive the most attention, many smaller names are rapidly expanding due to AI integration.

One such company is pure-play AI firm SoundHound AI (SOUN), which continued to impress investors and analysts recently with strong second-quarter results. The company is a market leader in voice AI technology, providing advanced voice recognition and natural language processing solutions via its flagship Houndify platform. SoundHound's technology is used in various industries, including automotive, hospitality, retail, and smart home devices. 

SOUN stock has risen by an impressive 133.5% year to date, outperforming the S&P 500 Index's ($SPX) gain of 17.6%. Despite its meteoric rise this year, Wall Street believes SOUN's stock could skyrocket even higher, given the growth of the AI customer service industry and the company’s strategic acquisitions to boost growth. 

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SoundHound AI is Getting Stronger

SoundHound AI's Houndify platform is gaining traction, particularly in industries where customizable voice solutions are in demand. This demand has been strengthening its finances. 

In the second quarter of 2024, total revenue increased by 54% year on year to $13.5 million. The cumulative subscription and booking backlog doubled to $723 million during the quarter. Booking backlog refers to the contractual revenue that the company has not yet realized.  

Recently, SoundHound announced the acquisition of a leading enterprise AI software company, Amelia, for $80 million in cash and equity. SoundHound believes that this acquisition will expand its conversational AI services into new industries, including "retail, financial services, healthcare, automotive, smart devices, restaurants, and more." Furthermore, this acquisition is expected to drive profitability by 2025. 

In the second quarter, the company also acquired the online ordering platform Allset, allowing customers to use SoundHound's "voice AI to order food from their vehicles, phones, and smart devices."

Furthermore, the company has established high-profile partnerships with industry leaders and well-known brands, such as Hyundai, Mercedes-Benz, Chipotle (CMG), Samsung, Nvidia (NVDA), Qualcomm (QCOM), and others. 

Despite these strategic investments, the company's liquidity position remains strong. SOUN paid off $100 million in debt and ended the quarter with $201 million in cash. 

However, in a capital-intensive industry where stronger players like Amazon (AMZN), Apple (AAPL), and Google (GOOGL) compete for market share, SoundHound remains a small-cap company with a market capitalization of only $1.6 billion. The company's ability to continue raising funds and managing cash flow will be critical to its long-term viability. 

Profitability Could Be in the Cards Soon

SoundHound, like any growth stock, is now solely focused on expanding its business and solidifying its position in the rapidly expanding voice AI market. As a result, the company’s bottom line is still in the red.  However, adjusted net losses were $0.04 per share in the quarter, down from $0.07 per share a year earlier. 

The acquisition of Amelia led the company to revise its revenue projections for the next two years. Revenue is expected to exceed $80 million in 2024 and $150 million in 2025. 

Analysts covering SOUN stock have similar projections. SoundHound's revenue is expected to increase by 79.9% to $82.5 million in 2024, followed by an additional 84.2% growth to $152.1 million in 2025. Analysts also expect losses to narrow to $0.35 per share in 2024 and $0.21 in 2025, respectively. 

Priced at 21.5x forward 2024 estimated sales, SOUN stock appears to be trading at a premium. However, given the company's rapid growth prospects in the AI customer service industry and strategic expansion plans, the premium may be justified.

SoundHound AI's growth strategy, which includes expanding its customer base, improving its technology, and increasing its presence in international markets, may pay off in the coming years. The company is also working on developing new features and capabilities for its Houndify platform, which could generate additional revenue from both existing and new customers. 

The global speech and voice recognition market is expected to be worth $84.9 billion by 2032, with SoundHound well-positioned to benefit from that projected growth. 

What Does Wall Street Say About SoundHound AI?

Following SoundHound’s impressive Q2 results, D.A. Davidson analyst Gil Luria reiterated a “buy” rating on the stock. Furthermore, Wedbush analyst Dan Ives also maintained a “buy” rating with a price target of $9.

More recently, H.C. Wainwright analyst Scott Buck reiterated a “buy” rating on SOUN, with a target price of $7. Buck’s bullish rating is based on SoundHound's strong Q2 results and impressive backlog, which reflect increasing customer demand.

Although SoundHound is not yet profitable, Buck believes that the company's strong balance sheet and market opportunities make for promising long-term prospects.

Overall, Wall Street analysts are bullish, and rate SOUN stock a “strong buy.” Of the six analysts covering SOUN, five rate it a "strong buy," while one rates it a "hold." The average target price of $7.58 implies the stock can rise another 53.1% from current levels.

Furthermore, the Street-high price estimate of $9.50 implies that the stock can rally 91.9% over the next 12 months. 

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On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.