SoundHound's Artificial Intelligence Stock Surges by 1051% in 2024. What Might Be Its Value by the Year's End in 2025?
Houndify AI (HOUN -9.94%) is a prominent innovator in conversational artificial intelligence (AI). Its shares debuted in the market in 2022, but it remained relatively obscure until February 2024, when Nvidia (NASDAQ: NVDA) disclosed that it had purchased a minor stake in the company.
Houndify's stock saw a fourfold surge shortly after this news broke, and it's now boasting a tenfold increase for 2024 on the last trading day of the year.
Nvidia's investment isn't the only factor driving such impressive gains. Houndify is posting strong operational results, and its latest projections suggest its revenue could double in 2025.
This development is positive news for investors, yet there's one concern: Houndify's stock is currently quite pricey, and its high valuation might hinder further growth in the upcoming year. So, what could the stock be worth in 12 months' time?
A dominant force in conversational AI
Houndify's conversational AI technology is widely utilized in quick-service restaurants, hospitality venues, and some major automobile manufacturers due to its proficiency in interpreting voice commands and providing corresponding responses.
Houndify's AI services are employed in over 10,000 restaurant locations to automate drive-through ordering, phone orders, and even in-store ordering. Furthermore, restaurant staff can use Houndify's employee assistance technology for guidance on making menu items or assistance with handling customer queries. Well-known chains such as Chipotle, Krispy Kreme, and Papa John's are among the company's clientele.
In the automotive sector, Houndify's Chat AI software enables manufacturers to incorporate voice assistants into their vehicles, allowing drivers instant access to features like sports scores and flight information. Brands like Mercedes-Benz, Hyundai, and Stellantis, the parent company of Chrysler, Jeep, and Dodge, are some of Houndify's prominent clients in this area.
Houndify is extending its reach to other industries, such as financial services, healthcare, and insurance, thanks to its recent acquisition of Amelia. This AI specialist enables businesses to develop virtual agents to serve their customers and employees.
Ninety percent of Houndify's revenue stemmed from the automotive industry alone during the third quarter of 2023. However, in the third quarter of 2024, which ended on Sept. 30, five different industries accounted for between 5% and 25% of its overall revenue. This underscores how much Amelia boosted Houndify's client base diversity.
Houndify's revenue is expanding at an extraordinary pace
Houndify posted a record $25.1 million in revenue during the third quarter. This was an increase of 89% from the previous year, primarily due to the inclusion of Amelia's revenue for the first time. The impressive results prompted management to raise its revenue forecast for both 2024 and 2025.
The company now predicts generating between $82 million and $85 million once the year is over, marking an 82% increase over 2023 at the midpoint of the range. In 2025, Houndify expects to garner between $155 million and $175 million in revenue, which would represent a remarkable 97% growth from 2024 at the midpoint of the range.
Houndify informed investors that its order backlog exceeded $1 billion at the end of Q3, which it expects to convert into revenue over the next six years. This figure doubled year over year, indicating a favorable outlook for the company's future sales growth.
However, Houndify is losing substantial amounts of money while accelerating its business growth. It lost over $92 million based on generally accepted accounting principles (GAAP) through the first three quarters of 2024 alone. Since the company has only $136 million in cash reserves, it can't afford to burn money at this rate.
Houndify recently announced a new at-the-market equity facility, enabling it to issue additional shares to investors to secure an extra $120 million when required. While it will strengthen the company's financial future, it will also dilute existing shareholders. Additionally, it's uncertain whether an additional $120 million will secure profitability, necessitating even more cash down the line.
Houndify stock is highly priced following its extraordinary gain
Houndify's market capitalization has swelled to $8.8 billion following the 1,051% increase in its stock price this year. Based on its trailing-12-month revenue, this translates to a price-to-sales (P/S) ratio of 109.
For comparison, Nvidia stock trades at a P/S ratio of 30, making Houndify stock three times as pricey. Considering Nvidia is anticipated to generate over $129 billion in revenue during its present fiscal year, is highly profitable, and boasts a proven track record of success that stretches over decades, Houndify's high valuation is challenging to justify.
With that said, Houndify's revenue is growing at such a rate that its stock appears less expensive even if we only focus on the next year. If we assume the company generates $175 million in revenue during 2025, the high-end of management's forecast, this places the stock at a forward P/S ratio of 50.3.
The AI stock associated with SoundHound remains one of the priciest in the market, even considering future prospects, implying that investors might need to hang on for a minimum of two years before the valuation looks appealing. This situation introduces a substantial amount of doubt, as no one can accurately predict SoundHound's future business scenario past the management's forecast for 2025.
Given this, I believe the high valuation might hinder any potential price growth moving forward. In fact, it's not inconceivable that SoundHound's stock could experience a decline in 2025, unless the company manages to elevate its revenue projection throughout the year. Investors should exercise caution when considering a purchase at the current price, but if they do decide to buy, they should be prepared to hold onto it for a substantial period to maximize the likelihood of securing a profit.
Houndify's impressive revenue growth and strong operational results have attracted interest from investors, leading many to consider investing in its stocks. Given Houndify's current high valuation, some investors might choose to invest cautiously, considering the potential for future revenue growth to justify the price.
To achieve its projections for 2025, Houndify needs to maintain its current growth trajectory and manage its financial resources effectively, ensuring it doesn't burn through its cash reserves at an unsustainable rate. By focusing on strategic investments and cost management, Houndify can continue to cement its position as a dominant force in conversational AI, attract new clients, and further boost its revenue.
