Few people doubt that voice-recognition software specialist SoundHound AI (SOUN) is an impressive enterprise. However, the fundamentals eventually matter, and therefore, investors may be better served waiting for a better deal. That’s the thesis in a nutshell: great company but not-so-great valuation. As such, I view SOUN stock as a Hold but with anticipation for an eventual green flag.
It Comes Down to the Numbers for SOUN Stock
Let’s just dive right into it: SOUN stock is overvalued when stacked against its revenue. It carries a price/sales multiple of 37.8x. In contrast, the underlying application software sector runs an average sales multiple of 4.1x revenue.
Granted, just saying that SOUN stock is priced to the extremes is unfair without considering the context. After all, the application software encompasses a wide range of business purposes, from the mundane to the exceptionally innovative. Arguably, SoundHound rises near the latter end of the spectrum.
The company is perhaps most famous for its namesake app, which allows users to play songs and has the app identify who the creative act is. However, the company also features its Houndify developer platform, which allows enterprise-level clients to craft their own voice-recognition platform.
It’s really on the cutting edge of the current productivity paradigm of artificial intelligence. Thus, no questions exist about whether SOUN stock deserves a premium. However, investors won’t just pay premiums for the heck of it. At some point, a fundamental justification for the upgrade must exist.
This is where the situation gets tricky. According to Precedence Research, the broader application development software market came out to a valuation of $155.64 billion in 2022. By 2032, the segment may be worth $328.3 billion. If so, that would imply a compound annual growth rate of 7.8%.
Now, let’s look at one segment of the aforementioned arena that SoundHound is attempting to break into: automotive voice recognition systems. This space reached a valuation of $2.89 billion last year, according to Precedence. By 2032, the ecosystem could be worth $11.17 billion, implying a CAGR of 16.2%.
So, the subsector CAGR is a bit more than twice that of the mainline sector. Very roughly, then, investors may feel justified to pay the same magnitude premium in their sales multiple. That would come out to 8.5x. Understandably, this isn’t a standard analytical comparison. Nevertheless, a 37.8x multiple is a far cry from 8.5x.
A Not-So-Irrational Way to Look at the Situation
Earlier this year, Stellantis (STLA) announced that its voice assistant with integrated ChatGPT will be integrated into Japanese-based vehicles under the Stellantis brand. Recently, news broke that this partnership between the software firm and the automotive giant has expanded into several European markets.
To be sure, SOUN stock was already on the move before the news item. Still, the expansion into European markets only emboldened the bulls. It’s understandable why investors are so excited about the opportunity, given the success of numerous other AI-related companies. Further, SOUN is “cheap” in terms of its stock price, currently at $5.83.
However, this “discount” may have pushed the valuation to the extreme. Let’s consider the case of Alphabet (GOOGL), which trades at a sales multiple of around 7.6x. Also, look at Microsoft (MSFT). It features a sales multiple of 14.31x. No, it’s not an apples-to-apples comparison when you consider the market capitalization, obviously.
Still, please note that both companies are competing in the audio and speech-recognition market. Sure, SoundHound is gaining momentum by inking deals with a major automaker. Such a significant endorsement cannot be overlooked. And considering the modest per-share price of SOUN stock, the temptation to buy in right now is understandable.
However, it’s very possible that astute investors will recognize the mismatch between the premium SOUN stock commands relative to that of the competition. In other words, the low-hanging fruit of convincing investors to acquire shares when they traded at a multiple of 11.44x (back in the third quarter of 2023) is gone.
That was a steal back then. At nearly 40x, the multiple is much harder to justify, either stacked against the competition or the growth of the niche automotive voice-recognition software subsegment.
Is SoundHound AI Stock a Buy, According to Analysts?
Turning to Wall Street, SOUN stock has a Strong Buy consensus rating based on four Buys, one Hold, and zero Sell ratings. The average SOUN stock price target is $7.50, implying 28.6% upside potential.
The Takeaway: SOUN Stock Is Promising, But Prudence Is Key
As stated earlier, SoundHound AI is a promising enterprise. Just the voice-recognition AI element itself is a compelling solution, and with the company inking a major deal with Stellantis, the underlying endorsement indicates the power behind the innovation. Nevertheless, it’s important to recognize that investors aren’t going to pay ridiculous premiums just for the fun of it. With that said, it may be prudent to wait for a better entry point.
