There are a lot of growth stocks available to investors, many of them trying to ride the massive wave of artificial intelligence popularity. How do you make a smart decision when choosing one?
You need to look at a company's long-term opportunity, its recent growth, and be clear-eyed about its risks.
One such stock that looks like a smart place to put $500 right now is voice assistant company SoundHound AI(NASDAQ: SOUN). Here's how the company stacks up.
What SoundHound AI does
SoundHound AI has been developing voice recognition software long before AI became the next big thing, and has more than two decades of experience in this space. In a nutshell, the company's software helps enterprises better serve customers using conversational AI in industries including restaurants, in-car infotainment, smart devices, hospitality, and call centers.
Image source: Getty Images.
In practical terms, restaurants can use SoundHound's AI tools to take reservations and allow customers to order over the phone or in a drive-thru. Its tech also gives car owners an easy way to interact with their in-car infotainment systems, hands-free. And the company's speech recognition tools have already caught the attention of large companies and are used by Qualcomm, Chipotle Mexican Grill, and in Stellantis' automotive brands.
If you need more proof that SoundHound AI's tech goes beyond the AI hype, Nvidia invested in the company earlier this year and uses SoundHound AI's voice assistant software in its Nvidia Drive drive-assistance system.
In addition to its core markets, the company recently made a big move to expand into other industries with its $80 million purchase of a company called Amelia. The purchase gives SoundHound AI a larger footprint in conversational AI services for insurance, financial services, healthcare, and retail.
SoundHound AI's opportunity and risks
SoundHound AI's stock has spiked 196% over the past 12 months as investors have become increasingly bullish on the company's outlook.
Part of that optimism comes from the company's recent second-quarter results (which ended Aug. 8), in which sales jumped 54% to $13.5 million. That increase, along with the Amelia acquisition, led SoundHound AI's management to estimate full-year sales will reach $80 million, up 74% from 2023.
The company's leadership estimates sales will expand to $150 million by the end of 2025 -- more than 3x SoundHound AI's 2023 revenue. Management believes SoundHound AI's growth potential stems from enterprise spending ramping up in the coming years, with McKinsey estimating generative AI spending in the range between $175 billion and $250 billion by 2027.
As with any growth stock, there are some risks to buying SoundHound AI. First, competition is fierce in the tech sector, and a host of other conversational AI companies could pose a threat. But perhaps the biggest risk is that the company isn't profitable yet.
SoundHound AI's generally accepted accounting principles (GAAP) net loss in the second quarter was $37.3 million, larger than its loss of $27.3 million in the year-ago quarter.
Investors will want to see losses narrowing in the near future and should keep a close eye on whether the company is moving in that direction or not. Some good news on this front is that some analysts estimate SoundHound AI's loss per share will be $0.34 in 2024 and narrow to a loss of $0.20 in 2025.
Why SoundHound AI is a buy right now
I think SoundHound AI's stock could be a smart place to put $500 right now because the company's tech has already proven itself as a must-have feature among major enterprises, and it continues to build on that foundation. Plus, its Amelia acquisition is already adding to the company's top line, and the expansion it brings into new industries could pay off for years.
With large companies like Stellantis, Nvidia, and Qualcomm already using the tech and more companies investing in AI tech like never before, SoundHound AI is well positioned to tap into markets where voice assistants are a must but where companies don't have the time or skills to develop their own.
SoundHound AI's shares currently have a price-to-sales ratio of 26, which means it's not exactly cheap. Investors can likely expect some volatility with the stock, but putting $500 into SoundHound AI right now could end up being a smart buy as AI-enabled voice assistants permeate everything from food orders to in-car infotainment systems.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Qualcomm. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
