Looking at Wall Street analysts' price targets can be a worthy exercise, because it may identify some stocks with huge upsides you haven't considered. After finding such a stock (at least according to analysts), the best move is to do your own research and see if you can confirm their findings. One stock with massive upside is SoundHound AI (NASDAQ: SOUN), a small artificial intelligence (AI) company.
Gil Luria from D.A. Davidson has a price target of $9.50 on SoundHound's stock. This was last updated on Sept. 30, so the analyst's target is based on the same information that all investors have access to now. That price target indicates around a 60% upside, which would be a fantastic one-year run for the stock.
Is this a legitimate price tag? Or should investors steer clear? Let's find out.
SoundHound's product has already been integrated in several industries
SoundHound AI does what its name implies: It uses AI to help identify and process sounds. While recognizing audio and converting it into something that can be input into a computer is a very broad and useful technology, SoundHound is finding commercial success in two specific areas: restaurants and automaking.
On the restaurant side, the company is helping streamline operations by using its AI model to take drive-thru and mobile orders. The performance of these models often exceeds that of the humans they supplement, allowing restaurants to become more efficient.
On the automotive side, the company has been integrating its technology with various generative AI models to make driving assistants more useful. Its most notable client is Stellantis, and SoundHound's model has been integrated with various makes and models under the manufacturer's umbrella in Europe and Japan.
Those are relatively niche uses for the technology but finding success in a few areas before expanding elsewhere is key when growing a company. The business case is there, but how about its financials?
2025 is slated to be a massive year for SoundHound
SoundHound is still a relatively small company, so its revenue figures may not jump off the page at you. In the second quarter, it generated $13.5 million in revenue, up 54% year over year.
However, it has a revenue backlog totaling $723 million. This shows the huge demand for its technology, but it takes a while to integrate and test out before SoundHound can recognize it as revenue from its partnerships.
Management is bullish that it can start converting some of that backlog into revenue in 2025, so it expects revenue to exceed $150 million next year. That's rapid growth, but if it happens, the $9.50 price target doesn't seem so far-fetched.
Right now, SoundHound stock looks expensive because it trades at 30 times sales.
SOUN PS ratio; data by YCharts; PS = price to sales.
But that's using trailing data. If we plug in management's 2025 revenue projection of $150 million, then its price-to-sales ratio (P/S) tumbles to 11 times forward sales. That would be a pretty cheap valuation, considering that the company would have essentially doubled its revenue at that time.
So SoundHound's valuation could end up being higher than 11 times sales, which would cause the stock to rise. As a result, I don't think the $9.50 price target is out of line.
If management can deliver on what it told investors during its second-quarter conference call, then SoundHound AI will easily be a market-crushing investment next year. Because of that, I think investors can buy the stock if they believe in what management is saying and the company's potential market opportunity.
Should you invest $1,000 in SoundHound AI right now?
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
