Where Will SoundHound AI Stock Be in 5 Years?

Shares in this small-cap AI company have surged this year. But is the rally based on hype or substance?

When it comes to long-term investing, it can pay to bet on smaller, less established companies with substantial growth potential over the coming years. With a market capitalization of just $1.6 billion, SoundHound AI (SOUN -1.71%) certainly fits the bill. And with shares up a whopping 145% year to date, near-term momentum looks strong.

But is SoundHound’s recent rally just a hype-driven fluke or the start of an enduring bull run? Let’s dig deeper into what the next five years could have in store for this innovative artificial intelligence (AI) company.

What is behind SoundHound’s explosive rally?

Founded in 2005, SoundHound AI specializes in voice, sound, and language-recognition software, which can augment or replace human labor in restaurant drive-throughs or call centers. This technology synergizes with the generative AI behind platforms like OpenAI’s ChatGPT. And SoundHound has enjoyed a surge of interest as businesses automate their operations to stay ahead of the competition.

The company’s fourth-quarter results demonstrate growing demand for its services. Revenue jumped 80% year over year to $17.1 million as management signed several deals adding its voice assistant to automakers, smart TVs, and restaurants, including White Castle, Krispy Kreme, and Church’s Chicken.

While the company remains unprofitable, it is moving in the right direction, with operating losses dropping by a whopping 57% to $12.4 million versus the prior-year period.

What could the next five years have in store?

Image source: Getty Images.

There is a lot to like about SoundHound. For starters, its total addressable market is massive. Restaurants are not necessarily tech savvy enough to build their own AI drive-through systems from scratch, giving SoundHound a vast opportunity as a third-party service provider. The company’s pivot to generative AI could also open up similar opportunities in the auto industry where voice assistants seem like a natural fit, allowing drivers to access information completely hands-free.

Over the next few years, SoundHound could enjoy an elevated growth rate as its technology improves and more companies sign up for its services. With that said, it may eventually face competition from mainstream AI rivals like OpenAI, which has begun developing similar software. But its first-mover advantage should help it gain market share and brand recognition in what promises to become a competitive market.

Is SoundHound stock a buy?

While SoundHound has potential in the burgeoning AI industry, investors should also pay attention to less glamorous aspects of the company, like its balance sheet. These numbers could significantly impact the stock’s performance over the coming years.

With just $95.3 million in cash and equivalents on its books, the company can only absorb a few more quarters of current operational losses. And it will probably continue to raise outside capital by issuing new shares as it has done in the past. Equity dilution will allow SoundHound to maintain unprofitable operations indefinitely, but it can hurt current shareholders by reducing their claim on its future earnings and cash flow.

SoundHound seems to have a bright future in a fast-growing opportunity, but it looks too early to buy shares, considering its ongoing losses and reliance on shareholder dilution. Investors may want to wait for more quarters of data before taking a position in the stock.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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