Predicting that a stock will double in a certain time frame is a bold call, but predicting it will happen within two-and-a-half years is an even bolder take. However, I think that SoundHound AI (NASDAQ: SOUN) stock has the potential to do that if certain conditions are met.
This rocket-growth AI stock is expected to put up unbelievable growth this year, and if it continues that trend, the valuation could certainly double by 2027.
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SoundHound AI is seeing a ton of growth
SoundHound AI gives its clients a new way to interact with generative AI models. These models are normally prompted by text input through a keyboard, but that's not always practical. Instead, using a voice to prompt the model (like in a drive-thru or driving a car) can be a much better solution in some areas.
That's where SoundHound's product comes into play, as it is a leader in audio recognition. This isn't a groundbreaking or innovative technology, as AI assistants like Siri and Alexa have been around for a long time. However, they often make errors and don't do what you want them to. SoundHound's product is far more advanced than those products and often outperforms its human counterparts in many situations.
While SoundHound's niche used to be restaurants and car assistants, it has since expanded to include financial services, insurance, and healthcare. This expansion is key to driving further growth, which in turn holds the keys to where SoundHound AI's stock is going.
In 2024, SoundHound AI closed out the year with fourth-quarter revenue growth of 101%. That's an impressive figure, and management expects the growth train to keep on rolling in 2025.
For 2025, the company expects revenue to be between $157 million and $177 million, indicating 97% growth over the year. Anytime a company can essentially double its revenue in a year, it is impressive, but what implications does that have for the stock?
2025's revenue doubling projection is priced into the stock
From a price-to-sales (P/S) basis, SoundHound AI's stock looks expensive.
SOUN PS Ratio data by YCharts
It's more common to see software companies trade between 10 and 20 times sales, but SoundHound AI isn't a typical software company; it's projected to double its revenue in 2025.
So, if SoundHound's stock price doesn't move this year and it doubles its revenue, the stock will be worth around 15 times sales. At that time, it will be valued like an average software company, and any growth that the stock experiences will come from future business performance in 2026 and 2027.
But is there really that much growth left if SoundHound's revenue doubles this year? According to management, yes, there is.
One important revenue aspect that management highlights is revenue backlog, which measures how much revenue is still left to be realized on a contract that has been signed. Now, this isn't recognized revenue, as those contracts could go away or decrease in value. But when you consider that new customers are still coming on board and signing new contracts, it's a safe bet that most of that revenue should be realized, unless SoundHound has major execution issues or a superior product comes to market.
As of the end of Q4, SoundHound's revenue backlog stood at around $1.2 billion, up 75% year over year. This clearly indicates that the company is signing a lot of new customers or dramatically expanding its contracts with existing ones.
SoundHound management stated that this backlog is approximately six years long, so if you back out the $157 million to $177 million in revenue it's expected to generate in 2025, there's still more than a billion dollars to be recognized in the five years after that. Furthermore, it's not like every contract on its book expires in six years, as some companies are in the middle of their contract cycle. If these companies renew, this number will likely increase even further, considering the demand for AI.
As a result, I wouldn't be surprised if SoundHound's revenue doubled from the end of 2025 to 2027, which would likely cause the stock to follow suit. This projection is entirely dependent on SoundHound's growth, and if the growth doesn't come, neither will the stock price appreciation.
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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.
