Can Buying SoundHound AI Stock Today Set You Up for Life?

Key Points

• SoundHound AI is experiencing a surge in demand for its audio recognition technology.

• SoundHound AI just set a company record for quarterly revenue.

• The stock comes with a premium price tag.

• These 10 stocks could mint the next wave of millionaires ›

SoundHound AI (NASDAQ: SOUN) is a popular AI pick because it's relatively small and doing remarkably well, which could translate to massive upside over the next few years. This is an attractive combination, and some are wondering if buying it today could set investors up for life.

This is a tall task for any stock, but with massive tailwinds surrounding AI and its buildout, is SoundHound AI a viable candidate? Let's find out.

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Image source: Getty Images.

SoundHound AI's product is being rolled out worldwide

SoundHound AI does exactly what it sounds like: It combines AI technology with audio recognition. This isn't a new concept; digital assistants like Siri and Alexa have been available for years. The problem is that these models leave a lot to be desired in terms of performance, but SoundHound AI far exceeds them.

SoundHound AI's audio recognition technology incorporates generative AI and can potentially replace humans in various roles, such as taking drive-thru orders or assisting individuals with banking transactions over the phone. Another way SoundHound AI is gaining popularity is through its integration into automated digital assistants. While we haven't seen this rollout in the U.S. yet, it's becoming available in other parts of the world, such as Japan and Europe. Eventually, it will reach the U.S. and could continue to be a driving factor in SoundHound AI's revenue stream.

With SoundHound AI having the potential to disrupt a ton of industries by automating human interactions, the sky is the limit for SoundHound AI's stock. This has shown up in its revenue growth, as SoundHound AI delivered impressive quarters recently.

In Q2, SoundHound AI blew revenue expectations out of the water. It reported revenue growth of 217% to a company-record $42.7 million. This illustrates the small size of SoundHound AI's business, as well as its rapid growth rate. As we start to see more practical deployments of SoundHound AI's technology, this number could quickly expand, making it a must-own stock.

But has the market already priced in its success?

SoundHound AI isn't a cheap stock

SoundHound AI is a long way from profitability, which is understandable given its rapid growth and the importance of the industry it is targeting. As a result, the best way to value the business is by using the price-to-sales (P/S) ratio. At 38 times sales, SoundHound AI is an expensive stock.

SOUN PS Ratio data by YCharts

Most software companies trade at a multiple of 10 to 20 times sales, so this represents a significant premium to pay. Then again, most companies aren't tripling their revenue year over year, so SoundHound AI's valuation makes more sense in that context. Management expects FY 2025's revenue to be $169 million, which would value the stock at 31 times full-year estimated sales. That's still expensive, but it aligns with some of the more premium-priced software stocks.

Essentially, the stock has priced in all of 2025's growth, but the question is, what comes next? CFO Nitesh Sharan had some commentary on that:

The numbers we're talking about this year will pale in comparison to the numbers we'll talk about for next year and the year after that. And we're certainly on that pathway. And I think historically, our growth organically of 50% plus, and now with other acquisitions going even double of that like that -- that's a pace that we anticipate for the foreseeable future.

A 50% growth rate for the foreseeable future is impressive and would certainly lead to a massive outperformer in the market. It also justifies SoundHound AI's current price tag. Still, this growth rate and price tag don't combine to create a stock that could set you up for life. It will likely be a successful investment if bought today, but there are still risks involved with the business. As a result, SoundHound AI makes for a smart addition to a portfolio, but with a proper weighting that adjusts for the risks of investing in a high-growth business.

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Keithen Drury 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.