After a remarkable 2024 in which SoundHound AI(NASDAQ:SOUN) Shares surge in price by an impressive 836% The new year is off to a disastrous start, as the provider of voice artificial intelligence (AI) solutions has already lost more than 17% of its value in the at the time of writing and was down as much as 36% at the beginning of the month.
What’s a little puzzling about the drop is that there was no company-specific news that could have caused this sharp pullback in SoundHound stock. Therefore, investors looking to add a AI stock their portfolios may be wondering if it’s a good idea to buy into this sharp drop in SoundHound stock, given the impressive pace at which the company has been growing.
Let’s find out if SoundHound stock is worth buying after a terrible start to 2025.
The rapid rise in SoundHound’s stock in the past year has sent its valuation to uncanny levels. The company is not yet profitable, so we will check its price-to-sales ratio to understand how expensive it has become.
SoundHound ended 2024 with a sales multiple of 90. The stock’s sharp decline this year has seen its sales multiple drop to 74. Although it is substantially lower than the price-to-sales ratio to which SoundHound traded last year, remains extremely expensive. . For example, the S&P 500 The index has a sales multiple of 3.1, while the US technology sector has a price-to-sales ratio of 8.1.
Of course, SoundHound is growing at a remarkable rate right now, so bulls can argue that it can justify its valuation. The company’s revenue guidance of $83.5 million for 2024 points to a potential jump of 82% from 2023, when SoundHound’s top line growth was 47%. Even better, the midpoint of SoundHound’s 2025 revenue guidance is $165 million, which would be nearly double the growth it projects in 2024.
But then, investors would do well to note that they can buy bellwether AI Nvidiawhich is a much bigger company and it is growing at a faster rate than SoundHound, with a much lower sales multiple of 30. Also, Nvidia’s forward earnings multiple of 32 makes the stock a better buy, given its dominant position in the AI chip market, where it has immense pricing power that is driving fantastic earnings growth. .
There is no doubt that the market in which SoundHound operates is currently in a nascent stage. According to market research provider Market.us, the voice AI agent market was estimated to be worth $2.4 billion by 2024. This figure is expected to increase at a compound annual growth rate (CAGR ) of almost 35% until 2034, generating annual revenue. of $47.5 billion by the end of the forecast period.
Therefore, SoundHound AI has a lot of room for growth in the long term. But justifying its current valuation may be difficult even if it manages to grow at a faster rate than the market it serves. Let’s see why.
We’ve seen that SoundHound’s management expects the company’s 2025 revenue to reach $165 million. Assuming the company’s top line grows to a 40% CAGR through 2034, which is slightly higher than the rate at which its end market is expected to grow, SoundHound’s annual revenue could reach slightly more of 2 billion dollars.
Given that SoundHound’s growth could slow over the next decade as it becomes a more mature company, the market is likely to put a much smaller premium on its valuation than it does now. Assuming SoundHound trades at eight times sales after a decade, in line with the U.S. tech sector average, its market cap could rise to $16 billion (based on estimated 2034 revenue of $2,000 million dollars).
This would represent a 220% jump from current levels. While this may seem like a big deal at first, investors should note that the projected market capitalization after a decade indicates that SoundHound stock could deliver annual gains of 12% over that period. Buying SoundHound stock at its currently expensive valuation for these earnings doesn’t seem like a lucrative bet when we consider that the Technology Sector Nasdaq-100 The index has seen faster growth over the past decade.
Additionally, SoundHound’s one-year price target of $12.36, according to Yahoo! Finance, is lower than the current stock price. This suggests that analysts covering SoundHound believe the stock may have pulled ahead after its strong rally in 2024.
And finally, SoundHound’s recent decline hasn’t made it attractive enough to buy, which is why investors would do well to look now at other AI stocks that are trading at much more attractive levels and are on track to ‘take advantage of the large quantities that can be addressed. opportunities
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They drive hard has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool has one disclosure policy.
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