Up 140% This Year, Is Soundhound AI Stock Still A Buy?

(MENAFN- ValueWalk) The AI stock busted out of penny stock territory after strong second quarter earnings .

SoundHound AI (NASDAQ:SOUN) stock has put up a staggering 140% return this year, even though it has come back down to earth in recent weeks.

On Friday, the stock fell 6% to around $5 per share, putting it back around penny stock territory after it released second quarter earnings after the market closed Thursday.

It is a bit of a headscratcher as to why it fell, as SoundHound posted record revenue of $13.5 million, a 54% year-over-year jump. Analysts had called for $13.1 million in revenue.

The firm had a net loss of $37.3 million, which is 60% higher than the net loss a year ago, but it accounts for acquisition costs and other special items. On an adjusted basis, SoundHound had a $14.8 million net loss, or -4 cents per share, which was 8% lower than the same quarter a year ago. It also topped estimates of -9 cents per share.

The company also announced a key acquisition. So why was the stock moving lower?

SoundHound AI's AI-voice technology enables speech recognition, text to speech, music and content recognition, and other voice features for products, services and apps. It is used by restaurants, call centers, and in cars, among other applications.

In the second quarter, it had more than
5 billion queries on its platform, up about 90% year-over-year. Among its new clients is Beef OʻBrady's, a restaurant chain that will use SoundHound's voice AI ordering systems at its locations.

Also, it had $723 million in subscriptions and bookings backlog, which approximately twice what it was in the second quarter of 2023.

Importantly, it also improved its financials and balance sheet with $210 million in cash, up from about $130 million in the same quarter a year ago. It also paid down $100 million in debt.

The improved capital structure allowed the firm to make a key acquisition, buying a company called Amelia , an AI software company, for $80 million. Amelia specializes in customer service AI, which brings more depth and scope to what SoundHound offers.

“SoundHound AI has emerged as a
leader in bringing voice-enabled conversational AI to products and services. Now with more businesses choosing voice AI technology for customer service – and more consumers expecting a seamless, AI-powered service - this acquisition positions SoundHound as a strong force with range, scale, and world class technology,”
Keyvan Mohajer, CEO and co-founder of SoundHound AI, said.

With the acquisition of Amelia, SoundHound AI raised its revenue targets for fiscal 2024. In 2024, SoundHound anticipates revenue to exceed $80 million, up from the previous guidance of $65 million to $77 million.

It also projects to essentially double its revenue in 2025 to $150 million.

The acquisition seems like a good move, especially since the company has improving financials.

It could help the company not only expand its market and solidify its place as a leader at a time when spending on generative AI is only going to shoot higher and higher. McKinsey projected that between $175 billion and $250 billion will be spent on gen AI by 2027.

Friday's drop in price may be more of a reaction to the fact that it soared 21% to $5.21 per share on Thursday after the acquisition of Amelia was announced. It settled back down on Friday to around $5 per share, but the drop doesn't appear to have anything to do with the strong earnings.

It may be the fact that some investors felt it shot too high, when it is already has a high valuation and is up some 140% YTD.

The valuation, with a price-to-sales ratio of 26, up from 12 at the start of the year, is something to watch. Also, it is not profitable, but is moving in that direction.

I think SoundHound AI stock has great growth potential, but keep in mind, it is a young company and a penny stock, and they can be very volatile.

However, this acquisition seems to put the company on a new plane, and it seems like management has a good strategic growth plan.

Cantor Fitzgerald upgraded SoundHound AI stock to overweight, which is essentially a buy, with a $7 price target. It has a median price target of $8 per share, so analysts like its growth potential.

I'm typically wary of penny stocks, but this might be one to consider, because its entry price is so low and because of its massive potential as one of the leaders in a booming industry.

But, as always with penny stocks and young companies, be cautious and keep any allocations relatively small, initially.

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