After a remarkable 2024 in which SoundHound AI(NASDAQ: SOUN) stock surged in price by a stunning 836%, the new year has got off to a disastrous start as the voice artificial intelligence (AI) solutions provider has already lost more than 17% of its value as of this writing and was down as much as 36% earlier in the month.
What's somewhat puzzling about the drop is that there has been no company-specific news that could have caused this sharp pullback in SoundHound stock. So, investors looking to add an AI stock to their portfolios may be wondering if it is a good idea to buy this sharp dip in SoundHound's shares, considering the impressive pace at which the company has been growing.
Let's find out if SoundHound stock is indeed worth buying following a terrible start to 2025.
SoundHound is relatively cheaper right now, but there is a catch
SoundHound stock's rapid rise in the past year has sent its valuation to outlandish levels. The company isn't profitable yet, which is why we will check out 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 brought its sales multiple down to 74. While that's substantially lower than the price-to-sales ratio at which SoundHound was trading last year, it still remains extremely expensive. For example, the S&P 500 index sports a sales multiple of 3.1, while the U.S. technology sector has a price-to-sales ratio of 8.1.
Of course, SoundHound is growing at a remarkable rate right now, so bulls may argue that it may be able to justify its valuation. The company's revenue guidance of $83.5 million for 2024 points toward 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 stands at $165 million, which would be nearly double the growth it is projecting in 2024.
But then, investors would do well to note that they can buy AI bellwether Nvidia, which is a much bigger company and is growing at a faster pace than SoundHound, at a much lower sales multiple of 30. What's more, Nvidia's forward earnings multiple of 32 makes the stock a better buy, considering its dominant position in the AI chip market, where it has immense pricing power that's leading to terrific earnings growth.
There's no doubt that the market in which SoundHound is operating is currently in a nascent stage. According to market research provider Market.us, the market for voice AI agents was worth an estimated $2.4 billion in 2024. That number is expected to increase at a compound annual growth rate (CAGR) of nearly 35% through 2034, generating an annual revenue of $47.5 billion at the end of the forecast period.
So, SoundHound AI has a lot of room for growth in the long run. But justifying its current valuation may be difficult even if it manages to grow at a faster pace than the market it serves. Let's see why.
Here's how the next decade may look like for the stock
We have seen that SoundHound management expects the company's 2025 revenue to land at $165 million. Assuming that the company's top line increases at a CAGR of even 40% through 2034, which is slightly higher than the pace at which its end market is expected to grow, SoundHound's annual revenue could hit just over $2 billion.
Given that SoundHound's growth could slow down 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 is right now. If we assume that SoundHound is trading at 8 times sales after a decade, in line with the U.S. technology sector's average, its market cap could jump to $16 billion (based on 2034's estimated revenue of $2 billion).
That would be a 220% jump from current levels. While that might seem like a big deal at first, investors should note that the projected market cap after a decade indicates that SoundHound's stock could deliver annual gains of 12% during this period. Buying SoundHound stock at its currently expensive valuation for such gains doesn't look like a lucrative bet when we consider that the Nasdaq-100 Technology Sector index has clocked faster growth over the past decade.
Additionally, SoundHound's one-year price target of $12.36, according to Yahoo! Finance, is lower than its current stock price. This suggests analysts covering SoundHound believe that the stock may have gotten ahead of itself following its red-hot rally in 2024.
And finally, SoundHound's recent drop hasn't made it attractive enough to buy it, which is why investors would do well to look at other AI stocks right now that are trading at much more attractive levels and are on track to take advantage of huge addressable opportunities.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
