SoundHound AI (Nasdaq: SOUN) It's been a rollercoaster year, but there's more excitement to come and I think it's time to gear up for the next climb.
Despite negative earnings and a surprisingly high valuation, SoundHound AI stands out as a diamond in the rough. The voice control specialist's shares are currently down significantly from their previous highs, but don't be discouraged. Here's why I think this little artificial intelligence (AI) giant has a great future, and why I still consider it “undervalued” today.
Explore SoundHound AI
SoundHound AI is focused on voice AI and conversational intelligence technologies, areas that are becoming increasingly important in a technology-driven world. It has a backlog of long-term contracts worth $682 million and a clear path to future revenues that seem largely ignored at current market prices.
Yes, shares have more than doubled since early February. NVIDIA (NASDAQ: NVDA) The company announced a small investment in SoundHound AI shares, but they remain well below the high of about $14 the company hit shortly after its inflation-plagued initial public offering in the spring of 2022.
Incidentally, the market buzz around Nvidia's investment was more than hype: It was a nod from an established tech giant to the long-term potential of SoundHound AI. While the stock has since cooled, the company's fundamentals have far from cooled.
Financial Indicators and Growth Outlook
Despite current low profitability and high valuation ratios, SoundHound AI remains in strong financial position, with the aforementioned backlog approaching $700 million as of Q1 2024, up from $336 million in the same period last year. This backlog reflects committed client engagements and realistic adoption projections for subscription services, providing a solid foundation for future revenue.
The rapidly rising balance of this column suggests that customer interest in SoundHound AI's services is high and growing, and the backlog should turn into revenue over time. Currently, the company's stock is worth about 1.9 times its backlog.
Comparing backlog to price-to-sales ratios can be misleading because backlog represents potential future revenues, whereas price-to-sales ratios are based on current revenues.
So it's not a completely fair comparison, as the stock looks expensive at a price-to-sales multiple of 25.5x. Revenue-generating services are years away from being complete. Still, most growth stocks would sell their mothers off for such a backlog.
Additionally, SoundHound has a strong financial foundation. With a cash balance of $180 million and long-term debt of only $85.5 million, SoundHound is well positioned to continue its growth trajectory. This strong foundation is essential during the rapid growth phase of any ambitious startup, allowing the company to optimize its top-line growth trajectory while still covering its bottom line. In other words, this massive backlog would not exist if SoundHound AI was not willing to fund this phase of its business through debt instruments and public market sales.
A structure for long-term growth
SoundHound AI may be in rough waters, but that's part of its appeal. Sure, its stock has crashed, but its fundamentals point to a brighter outlook. The company has a sizable backlog of long-term contracts, and its strategic moves have positioned it well for future growth.
Investors should prepare for a tough road, but the potential rewards should be worth the discomfort. SoundHound AI's innovative technology, combined with its impressive backlog, suggests that nearly two decades after the company was founded, this growth story is only just beginning.
For those willing to embrace some excitement and weather some twists and turns, SoundHound AI could be the key to above-market returns. It's not a quintessential value stock, but it's hard to find a better buy in the currently overheated AI sector. I would definitely buy SoundHound AI stock long before betting on Nvidia's lofty valuation.
Should you invest $1,000 in SoundHound AI right now?
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Anders Bylund has invested in Nvidia and SoundHound AI. The Motley Fool invests in and recommends Nvidia. The Motley Fool has a disclosure policy.
This article SoundHound AI is the Most Undervalued Artificial Intelligence (AI) Stock to Buy Now was originally published by The Motley Fool.
