Is it too late to buy SoundHound AI(NASDAQ: SOUN) stock today? If so, my own investment five months ago will turn out to be a terrible deal in the long run.
The artificial intelligence (AI) expert providing high-quality voice control tools has seen a 25% stock price drop since then. But I'm quite convinced that time and business trends will prove me right.
In fact, I'm tempted to double down on my SoundHound AI position at these lower prices. Here's why.
The basic facts about SoundHound AI
Let's keep the company introduction kind of short this time. You already know it's a young stock but an old company, hammering out a unique AI-based voice control system over the last two decades. The stock soared when Nvidia bought $3.7 million of SoundHound AI, only to fall back when that rare investment didn't lead to a larger cash infusion or an exclusive Nvidia partnership.
I hope you're also up to date with SoundHound AI's backlog of long-term contracts and other unfilled orders. In May's first-quarter report, that repository of untapped future revenue was worth $382 million, up 80% from the year-ago period. The average length of these backlogged agreements was seven years.
Assumptions for a valuation experiment
Let's work up an estimated price-to-sales ratio for SoundHound AI's stock that takes the backlog into account. This is a thought experiment, relying on some simplified assumptions that won't be anywhere near the true story:
- The conversion of contracts on paper to cash-based revenue won't be a smooth "divide by seven" operation.
- I'll work with the already reported numbers, implying that the 80% annual growth rate will hit a brick wall in the next report.
It's a mixed bag of overly bullish and bearish estimates, but the end result should be close enough to make my point. So please don't expect incredible precision in the valuation metrics I come up with, but feel free to treat them as a directional guide for SoundHound AI's mid-term pricing trends.
Estimating SoundHound AI's projected revenue
It's a simple calculation under these abridged assumptions: $682 divided by 7 is an average annual revenue stream of roughly $97.4 million per year. Add that to the company's current annual sales of $50.8 million, and you'll get $148.2 million of hypothetical annual revenue. Again, that figure involves impossibly smooth revenue collections, but also a highly improbable end to SoundHound AI's growing pile of long-term contracts.
With a market cap of $1.5 billion today, SoundHound AI's stock is worth about 10.1 times that frozen snapshot of its annualized sales.
Given SoundHound AI's rapidly growing backlog and equally impressive sales ramp-up, I'll switch back to realistic growth assumptions. Now that I have an approximate price-to-sales ratio reflecting the long-term value of SoundHound AI's backlog, it's time to compare this value to the company's peers:
SOUN Revenue (TTM) data by YCharts.
Who are these peers? I peeked at SoundHound AI's latest proxy statement, published in April 2024. There, the board of directors selected 19 software companies with comparable market caps and revenue in order to benchmark executive compensation practices in this peer group. Five of the companies were acquired by private equity firms over the last three years -- hold that thought -- but the remaining group of 14 names should help me make some reasonable comparisons.
Comparing SoundHound AI's valuation with its closest peers
The average price-to-sales ratio in SoundHound AI's publicly traded peer group is about 6.5. Outliers include the richly valued real estate data analytics expert AppFolio(NASDAQ: APPF) and supply chain software specialist SPS Commerce(NASDAQ: SPSC), both of which trade at roughly 14 times sales. At the other extreme, digital knowledge manager Yext(NYSE: YEXT) and financial reporting software-maker Domo(NASDAQ: DOMO) are changing hands at 2x and 1x trailing sales, respectively.
So far, SoundHound AI's stock looks somewhat overvalued. I had to reach for the priciest names on the peer list to find real-world P/S ratios exceeding SoundHound AI's backlog-based ratio. Boo!
But what happens if I include the outlier peers in SoundHound AI's revenue-growth chart? It's a pretty eye-opening exercise:
SOUN Revenue (TTM) data by YCharts.
As you can see, SoundHound AI's sales are growing more quickly by leaps and bounds than the highest-valued names on that peer list (and the low-priced peers are too far back even to eat SoundHound AI's dust). With this chart in my pocket, my target company should ask for a much higher price-to-sales ratio than any of the names below.
When you include the firm future revenue streams resulting from that robust and rapidly growing backlog, SoundHound AI looks cheap at anything less than 20x that theoretical P/S ratio.
I won't stop drooling over this buying opportunity until the stock price doubles. Let's see how the revenue and backlogs are doing when the company reports second-quarter results in two weeks.
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Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends AppFolio, Nvidia, and SPS Commerce. The Motley Fool has a disclosure policy.
