Is SoundHound AI Stock a Buy?

The rapidly growing artificial intelligence (AI) market fueled a surge in the price of many AI-focused stocks. One of these is SoundHound AI (NASDAQ: SOUN).

Over the past 12 months, its stock skyrocketed an eye-popping 848% through Jan. 6. Part of these gains are due to its status as a meme stock. Another driver was H.C. Wainwright analysts boosting SoundHound's price target to $26 in December.

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Given the stock's massive price increase, it's fair to wonder whether SoundHound shares are a buy. Here's a look at the business to help determine if now is the time to invest in this AI company.

SoundHound's strategic acquisitions

SoundHound uses AI to provide businesses with software that understands human speech in 25 languages. Its breadth of supported languages helped it generate more than half its revenue outside the Americas during the first nine months of 2024.

The company once produced over 90% of its income from international markets, but that changed after SoundHound made some strategic acquisitions. The new businesses resulted in sales in the Americas soaring 963% over the first three quarters of last year.

SoundHound's key acquisitions included SYNQ3, a voice AI provider to the restaurant industry, and Amelia, whose AI software expanded SoundHound's presence into industries such as financial services and healthcare.

Thanks to these additions, SoundHound's third-quarter revenue rose 89% year over year to a record $25.1 million. This led to the company raising its 2024 full-year guidance from a minimum of $63 million in sales to $82 million. It also expects 2025 to bring in between $155 million and $175 million in revenue.

Not only did its acquisitions enable SoundHound to enjoy a substantial revenue jump, it reduced the company's reliance on a single, large customer. In 2023, 72% of the company's sales were to its largest client, but as of the end of Q3, that percentage had dropped to 12%.

In addition, its balance sheet is solid. SoundHound exited Q3 with total assets of $499.7 million with $135.6 million in cash and equivalents. Contrast this with total liabilities of $203.7 million.

SoundHound's areas for improvement

Although its acquisitions helped, they came with a downside. The new businesses contributed to a decline in SoundHound's gross profit margin.

In Q3, the company's gross profit margin was 49%, a substantial drop from the previous year's 73%. Management stated margins are expected to improve over time from cost synergies once integration of its acquisitions is complete.

This is important because SoundHound itself isn't profitable. It exited Q3 with a net loss of $21.8 million. The lack of profitability isn't an issue so long as the company's sales can continue growing.

Many tech companies sacrifice profits in favor of expanding their businesses as rapidly as possible. That's what SoundHound is doing.

Overall, SoundHound is in a better position than it was a year ago. Reducing its reliance on a single customer was a critical step in building a long-term business. At the same time, it expanded into many other industries where, a year ago, 90% of its revenue was concentrated in the automotive sector.

Assessing whether SoundHound stock is a buy now

Today, SoundHound is well positioned to benefit from the tailwind of the AI market's expansion. Forecasts predict the AI sector to hit $244 billion in 2025, up from 2024's $184 billion, and to reach $827 billion by 2030.

This contributes to the factors making SoundHound a compelling investment. But is now the time to buy, especially since shares are down from a 52-week high of $24.98 reached on Dec. 26?

Let's take a look at SoundHound stock's price-to-sales (P/S) ratio. This metric tells you how much investors are willing to pay for a dollar's worth of revenue.

Data by YCharts.

As the chart shows, SoundHound's P/S ratio is extremely elevated compared to historical trends. This suggests the stock price is overvalued at the time of this writing.

Therefore, while SoundHound is a promising company, now is not the time to buy. The ideal approach is to wait for the stock to drop further before scooping up shares.

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Robert Izquierdo has positions in SoundHound AI. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.