Is SoundHound AI Stock a Buy Now?

There may not be a hotter stock heading into 2025 than SoundHound AI (NASDAQ: SOUN). SoundHound AI rose 836% in 2024, making it one of the best-performing stocks in the market. Just a few weeks ago, it was up over 1,000%, but a pullback to end the year took away some of those gains.

With the stock falling nearly 20% from its all-time highs, some investors might see this pullback as an entry opportunity. While there are some key risks to understand with SoundHound, this could be a chance to get in on the stock before it heads higher.

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SoundHound's product is being used in more industries

SoundHound AI is obviously an AI company, but what sets it apart is how it inputs data into the AI model. Most generative AI models require users to input text into the program to get an output. SoundHound uses audio inputs to do this, which is an important segment. While this isn't a new technology by any means (think about Siri or Alexa), the results haven't been that great. Having a digital assistant process what you said incorrectly is frustrating and turns many off to the technology.

However, SoundHound's product is much more advanced and outperforms human counterparts in many scenarios. This has caused SoundHound's product to be adopted in many industries, including car digital assistants, restaurant drive-thru and mobile ordering, as well as banking and insurance.

This widespread adoption is part of the reason SoundHound's stock had a large run-up to the end of the year. During its Q3 earnings report, SoundHound noted that 90% of revenue came from the automotive sector and 72% came from a single client. Now, no sector makes up more than 25%, and its largest client only contributes 12% of revenue. That's huge news for diversification and gets SoundHound past a critical time in the expansion process.

But SoundHound isn't stopping there.

Management projects massive growth for 2025, with revenue projected to come in between $155 million and $175 million -- nearly double 2024's $82 million to $85 million guidance. This has investors excited about the stock and ignited the run-up to close 2024.

There is a huge use case for audio inputs into AI models, and if SoundHound's product emerges as the top option in the space, it will make a ton of money. But has all of that success already been baked into the stock price?

SoundHound's growth is strong, but maybe not enough to support the current price

In Q3, SoundHound's revenue rose 89% year over year. While that's solid growth, it is far less than the stock price has increased. As a result, the stock's valuation has gotten incredibly expensive.

SOUN PS Ratio data by YCharts

At around 90 times sales, SoundHound's stock is far from cheap. It's far more common to see software companies trade for about 20 times sales, which it did for the middle half of the year. Then again, most software stocks don't double their revenue year over year for multiple years.

So, what kind of success has been baked in already?

If SoundHound can double its revenue in 2025 and 2026, its revenue would increase fourfold and drop its valuation back to the 20 times sales range, but only if the stock price stays flat. That shows how lofty the expectations are for SoundHound, but is that warranted?

If its revenue increased fourfold from 2024's projections, it would be around $336 million. There are still plenty of software companies larger than that, so this isn't an outlandish number. However, Wall Street analysts currently estimate SoundHound's 2026 revenue to be around $202 million.

SOUN Revenue Estimates for Current Fiscal Year data by YCharts

That's a complete shot in the dark, so it shouldn't be taken as a solid projection, but it is good to know that Wall Street doesn't think SoundHound AI can achieve a revenue double in 2026, at least right now.

So, should you buy the dip? I'd say be patient and wait, or take a very small position to keep track of it. That way, if it runs up further, you'll still benefit. But you can load up more if it dips further. There's a lot of hype in SoundHound's stock, and that can cause violent price swings from day to day. You'll have to weather the volatility, but SoundHound has a promising product that could be a difference-maker in the decade to come.

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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.