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SoundHound AI (NASDAQ: SOUN) emerged as one of the hottest technology sector growth stocks on Wall Street. At the time of this writing, shares have skyrocketed an astonishing 870% year to date, powered by mounting market enthusiasm for the company's innovative artificial intelligence (AI) solutions that may just be at the beginning of transformative long-term growth.

Shareholders have plenty to celebrate as 2024 comes to an end but can this historic rally keep going? Let's explore where SoundHound AI stock might be in one year.

A leader in conversational intelligence

A key breakthrough of artificial intelligence lies in its capacity to understand and generate natural language. Human speech is quickly becoming the preferred way for people and AI-powered devices to interact for many applications, as intuitive voice communications offer significant advantages compared to a text-based experience.

SoundHound AI is a leader in this field of conversational intelligence, backed by its proprietary platform. From early success partnering with major automakers that are integrating the company's in-vehicle intelligence with voice assist and generative AI capabilities, a major development this year is the expanding number of use cases. The company is optimistic about its AI-enabled customer service solutions, in which AI agents can answer complex user inquiries in a wide range of industry verticals with a conversational voice.

Comments by CEO Keyvan Mohajer highlighted how the technology is advancing. During a recent earnings conference call with investors, Mohajer said:

AI customer service will become as necessary to all businesses as Wi-Fi and electricity. And thanks to the incredible strides voice AI has made in recent years, we believe users will prefer to have their questions and transactions handled by a consistent, accurate conversational AI agent than by a human.

Ultimately, this opportunity helps explain the market enthusiasm toward SoundHound AI stock.

Strong financial momentum

In the third quarter (for the period ended Sept. 30), SoundHound AI posted revenue of $25.1 million, an 89% year-over-year increase. The company now serves more than 200 enterprise-level customers, showcasing its diversifying business mix. For the full year, SoundHound AI expects revenue of around $84 million, marking an 83% jump from 2023.

A key revelation from the quarterly report came in the form of new guidance for 2025, with the company targeting revenue between $155 million and $175 million next year. This forecast suggests an accelerating growth rate of 96% at the midpoint estimate compared to the 2024 estimate. While profitability isn't expected in the foreseeable future, management aims to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2025.

An extreme valuation warrants caution

Following the spectacular rally in SoundHound AI stock, investors must contend with an objectively pricey valuation.

At a current $9 billion market capitalization, shares of SoundHound AI are trading at an eye-watering 90 times this year's revenue forecast as a forward price-to-sales (P/S) ratio. This level is well beyond other AI stocks like Palantir Technologies at a forward P/S ratio of 66 or Nvidia at 26, which in contrast to SoundHound AI are both profitable and generate positive free cash flow.

The market can often overlook those metrics and reward disruptive and high-growth companies with a premium valuation. Nevertheless, there is a case to be made that the market has gone too far with SoundHound AI, pricing in many of the positives in its outlook for many years to come. The risk is that results begin to underwhelm. Longer term, it's unclear if the company can maintain its technological advantage or how the conversational AI market will evolve in a highly competitive environment.

My SoundHound AI prediction

SoundHound AI stands out as a unique pure-play AI software company and the latest results speak for themselves. That being said, I believe it's just too expensive at the current level to buy with conviction. I predict shares will be lower by this time next year, with the silver lining that a correction could present an opportunity for patient investors to buy SoundHound AI at a lower and more attractive price.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

Where Will SoundHound AI Stock Be in 1 Year? was originally published by The Motley Fool