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SoundHound AI is the most undervalued artificial intelligence (AI) stock to buy now

SoundHound AI (NASDAQ: SOUN) has been quite a rollercoaster ride this year. But there is more excitement ahead and I say it’s time to buckle up for the next climb.

Despite its negative earnings and astonishing valuation multiples, SoundHound AI is a diamond in the rough. The voice control specialist’s stock is currently well below its previous highs, but don’t let that discourage you. Here’s why I think this little artificial intelligence (AI) powerhouse has a big future ahead of it, and why I’d still call it “undervalued” today.

A closer look at SoundHound AI

SoundHound AI focuses on voice AI and conversational intelligence technologies, areas that are becoming increasingly important in our tech-driven world. With a backlog of long-term contracts totaling a whopping $682 million, this company has a clear path to future revenue that seems to be largely ignored by the current market price.

Yes, the stock has more than doubled since the beginning of February, when the AI ​​giant NVIDIA (NASDAQ: NVDA) announced a small investment in SoundHound AI shares, but it is well below the peak price of nearly $14 recorded shortly after the initial public offering (IPO) in inflation-laden spring 2022.

The market frenzy surrounding Nvidia’s investment was more than just hype, by the way. It was a sign of a proven tech giant recognizing SoundHound AI’s long-term potential. Although the stock has cooled since then, the company’s fundamentals are anything but frosty.

Financial figures and growth prospects

Despite current unprofitability and high valuation ratios, SoundHound AI’s financial health remains robust. The backlog mentioned above is nearly $700 million in the first quarter of 2024, up from $336 million in the same period last year. This backlog reflects binding customer contracts and realistic subscription service adoption estimates, providing a solid foundation for future revenue.

A skyrocketing balance in this column suggests that customer interest in SoundHound AI’s services is high and rising, and the backlog should convert to revenue over time. The stock is worth about 1.9 times that backlog today.

Comparing backlog to price-to-sales ratio can be misleading because backlog represents future potential earnings, while price-to-sales ratio is based on current earnings.

So it’s not a completely fair price-to-sales comparison, where this stock looks expensive at a price-to-sales ratio of 25.5 – it will probably take years for the revenue-generating services to be completed. Still, most growth stocks would sell their proverbial mothers for that kind of backlog.

In addition, SoundHound has a solid financial base. With $180 million in cash on hand and only $85.5 million in long-term debt, SoundHound is well-equipped to continue its growth trajectory. This solid foundation is critical for the hyper-growth phase of a hungry upstart, allowing the company to take losses on the bottom line while optimizing its revenue growth trajectory. In other words, this massive backlog would not be what it is without SoundHound AI’s willingness to fund this phase of the business through debt issuance and open market equity sales.

Focused on long-term growth

SoundHound AI may seem like a wild ride, but that’s part of its charm. Sure, the stock has had some steep falls, but the fundamentals paint a promising picture. 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 bumpy ride, but the potential rewards should be worth the uncomfortable ride. SoundHound AI’s innovative technology, coupled with its impressive backlog, suggests this growth story is just beginning – nearly two decades after the company was founded.

For those willing to allow for a bit of excitement and ride out the ups and downs, SoundHound AI could be the ticket to above-average returns. It’s not a classic value stock, but in the overheated AI sector, it’s hard to find a better buy right now. I’d definitely buy SoundHound AI shares long before I bet on Nvidia’s lofty valuation.

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Anders Bylund holds positions in Nvidia and SoundHound AI. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

SoundHound AI is the most undervalued artificial intelligence (AI) stock to buy right now. Originally published by The Motley Fool

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