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While the mega-cap tech stocks have gotten most of the attention this year due to the artificial intelligence (AI) boom, many smaller tech players have the potential to get much bigger as the AI era progresses.
Penny stocks might not appear to be the most appealing investment. However, it's worth pointing out that many of today's most successful mega-cap stocks began as penny stocks. In this sense, penny stocks are mostly growth stocks that have a lot of room to run. That said, it is also critical to carefully select a penny stock after thoroughly researching its fundamentals, the industry it operates in, and its growth strategies to gain value over the long term.
Here, we'll be focusing on voice AI solution provider SoundHound AI (SOUN), whose AI-led long-term prospects could drive its stock price higher. Demand for its products led to a strong third quarter, and the stock has now rallied more than 28% just since the start of November - outperforming the S&P 500 Index's ($SPX) 7% gain. Plus, Wall Street analysts believe the stock will continue to skyrocket in the next 12 months.
What Does SoundHound AI Do?
With a market cap of $479 million, SoundHound AI gained popularity due to its robust AI platform, which enables businesses across industries to provide high-quality conversational experiences to their customers. Its technology has been integrated into a wide range of products and services, including smart speakers and in-car systems, as well as voice assistants, to provide users with a seamless and intuitive audio experience.
Its innovative offerings are contributing to the company’s improved financial strength. In its recent third quarter, revenue jumped 19% year-over-year to $13.3 million, beating the consensus estimate by $1.36 million. At the end of the quarter, its cumulative bookings backlog increased 13% year-over-year to $341.7 million. This expanding backlog is fueling revenue growth.
While the company is not yet profitable, GAAP net losses in the quarter narrowed to $0.09, which arrived in line with estimates, and improved from $0.15 in the year-ago quarter.
Talking about the results, CFO Nitesh Sharan stated, “With continued strong revenue momentum and sustained progress on the path to profitability, we are delivering against the key milestones we laid out earlier this year.”
AI Could Bring In More Growth
It's worth noting that SoundHound AI's customer base is rapidly expanding. To integrate its AI voice assistant capabilities in vehicles, SoundHound Chat AI has now partnered with Hyundai, Stellantis brand DS Automobiles, and Togg, a Turkish EV car maker. Management stated during the Q3 earnings call that the automotive brands that use the company's AI solutions currently account for 25% of all units produced globally.
Furthermore, its voice AI ordering solutions for enterprise restaurants, such as Jersey Mike's and Krispy Kreme (DNUT), are gaining strong recognition. SOUN also collaborated with Samsung Electronics to provide next-generation display technology for White Castle restaurants' voice AI drive-thru.
What’s more, SoundHound has launched its fully automated Smart Answering and Smart Ordering services for businesses to use voice AI for customer service operations. All of these strategic investments are likely to accelerate the company's growth in the coming years.
A month ago, Wedbush analyst Dan Ives talked about the transformational growth AI could bring, and how tech stocks stand to benefit the most. According to Precedence Research, the AI market could be worth $2.6 trillion by 2032. With already successful products and services, SoundHound stands to capitalize on this growth.
While expanding rapidly, the company must also be careful not to overburden its balance sheet. At the end of the quarter, it had $96.1 million in cash and cash equivalents and a long-term debt of $85 million.
Management is highly optimistic going into the fourth quarter, with revenue projected to be in the $16 million to $20 million range. That indicates an impressive growth of 68% to 111% from the prior-year quarter. The upper end of the forecast exceeds Wall Street's revenue expectations of $17.9 million for the quarter.
Another encouraging sign is that management anticipates operational profitability in the fourth quarter. The company foresees a positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in Q4 2023 compared to a negative EBITDA of $18.6 million in Q4 2022.
Meanwhile, analysts also predict solid growth for SoundHound AI in the coming quarters. For the full year 2023, revenue could grow by 50% to $47 million, while losses could further narrow to $0.37 per share, compared to $0.73 in 2022.
What's the Stock Price Prediction for SoundHound AI?
At present, out of the 5 analysts covering SOUN, all of them have a “strong buy” recommendation for the stock. Based on analysts' average price target of $5.04, Wall Street sees a gigantic upside potential of about 147% in the next 12 months.
Since SoundHound isn’t profitable yet, it can be valued based on its sales. Priced at 6 times forward 2024 projected sales, SoundHound is fairly reasonably valued for a growth stock. Analysts predict SoundHound’s revenue will grow 51% year-over-year to $70.27 million in 2024.
The Bottom Line on SoundHound AI
As technology continues to evolve, SoundHound is poised to shape the future of audio and voice-enabled experiences. The integration of AI into its products may lead to more strategic partnerships and collaboration in the automotive, healthcare, and entertainment industries.
With the transformative growth AI could generate in the coming years, I believe the company can drive its revenue to profitability, which is probably why Wall Street expects more than 100% upside for SOUN.
That said, keep in mind that while penny stocks are a bargain, they are also risky. Investors must carry out their due diligence before making any investment decisions in penny stocks.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
