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Is SoundHound AI Stock a Buy Now?

Source The Motley Fool

Artificial intelligence (AI) stocks are having their moment in the spotlight. For nearly two years, consumers, businesses, and investors have been betting big on the ability of AI to tackle all sorts of tasks due to the large language model breakthroughs from companies such as OpenAI and Alphabet.

One stock on the cutting edge of this industry is SoundHound AI (NASDAQ: SOUN). The company -- as its name suggests -- provides voice AI solutions to companies. Though 2024 has been quite volatile, shares are up over 100% year to date as the company delivers double-digit growth while tackling a huge market opportunity. Does that make the stock a buy right now?

Automating basic informative tasks

The goal of SoundHound AI is to provide AI assistants to businesses to help with customer and employee support. This could include voice chatbots for call centers, restaurant drive-thrus, or retail help kiosks. On top of this, it provides voice technology for automotive companies (i.e., the voice platform for your car) and other smart devices.

Growth has been strong for the company. The number of queries to a SoundHound AI voice assistant hit an annual run rate of 5 billion as of the second quarter, up 90% year over year. That's proof of the strong adoption of SoundHound AI's services. However, revenue is still small at just $13.5 million last quarter, though it grew 54% year over year.

More exciting is the company's subscriptions and bookings backlog, which totaled $723 million last quarter. Business clients lock into long-term deals with SoundHound AI, giving it a huge potential backlog versus the revenue it recognizes each quarter. This backlog figure should lead to more top-line growth in the years to come.

Competition heating up

Given the boom in AI start-ups, there are many competitors to SoundHound AI popping up. The company has a lead given it was started back in 2005, but there will be increased competition for deals across its addressable sectors.

Beyond these these start-ups, there are bigger competitors investors should be concerned about. For example, Alphabet offers Google Cloud Speech-to-Text. It has signed a deal with Wendy's to supply voice automation for its drive-thrus, a win that's in direct competition with SoundHound AI.

Alphabet has invested for years to vertically integrate the AI market. From computer chips and data to cloud computing infrastructure and the best research scientists in the world, few companies have the same level of firepower when it comes to AI tools. So, while SoundHound AI may have the edge when it comes to focusing on a small niche within the industry, Alphabet's push into this market should scare shareholders.

SOUN Net Income (TTM) Chart

Data by YCharts.

Valuation should give investors pause

SoundHound AI has a market cap of $1.65 billion as of this writing. That gives the stock a price-to-sales (P/S) ratio of almost 30 based on its trailing 12-month revenue. To be clear, that's the valuation multiple for sales, not earnings.

The company may be putting up strong revenue growth, but a P/S ratio above 10, let alone 20, is not sustainable for most stocks. Even if its valuation was much lower, I wouldn't want to own the stock at these prices.

SoundHound AI burned through $75 million of free cash flow over the last 12 months, and it posted a $108 million net loss. This is not a good place to be when competition is only heating up across the AI market, especially from a huge competitor like Alphabet with near-infinite resources. Combined with the nosebleed valuation, SoundHound AI is just too risky a stock to buy right now.

Should you invest $1,000 in SoundHound AI right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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