Is this penny stock a hidden AI gem ready to skyrocket?

Penny stocks are shares of companies with small market capitalization, low liquidity, and relatively high volatility. Investing in penny stocks can be highly speculative and risky, but it also offers the opportunity to make significant gains.

One penny stock with huge potential is SoundHound AI (SOUN), which has established itself as a major player in the space of speech recognition and conversational intelligence powered by artificial intelligence (AI). Founded in 2005, SOUN began its journey as a music recognition app, but as AI has evolved, the company has now taken on more comprehensive voice-driven AI capabilities.

As it continues to innovate and expand, the company’s financial position has improved. SoundHound’s ending of fiscal 2023 with a 47% year-over-year increase in total revenue and its smart growth strategies impressed analysts. Recently, the company reported another strong quarter and a promising start to fiscal 2024, prompting investors and analysts to take this penny stock seriously.

SOUN stock has gained an impressive 192.5% year-to-date, far outpacing the S&P 500 Index’s ($SPX) gain of 17.7%. Still, Wall Street believes SoundHound stock can rise much further given its desire for growth. Let’s find out more about it.

SoundHound’s financial health appears solid

SoundHound AI is seeing increasing adoption of its Houndify platform across industries – from automotive and hospitality to smart home devices – which is positively impacting the company’s financial performance.

In the first quarter of 2024, total revenue of $11.6 million increased a whopping 73% year-over-year. The cumulative increase in subscription and backlog of 80% year-over-year to $682 million was the reason for this outstanding performance. Backlog refers to contract revenue that has not yet been recognized.

While SoundHound AI is focused on expanding its market presence, profitability remains a critical milestone as with any growth stock. The company is working to reduce its losses; adjusted net loss per share decreased to $0.07 from $0.08 in the year-ago quarter.

SoundHound recently paid off $100 million in outstanding debt, leaving the company with $180 million in cash and debt-free cash, giving it a strong liquidity position. CFO Nitesh Sharan said, “We now have a debt-free capital structure that allows us to be even more flexible to meet increasing customer demand for our voice AI solutions.”

Although SOUN is a small company with a market cap of $1.7 billion, the company’s ability to maintain and grow its market share despite strong competition is a key factor for investors to consider. SoundHound has also made some strategic acquisitions and partnerships in the last year that will pay off in the long run.

In the first quarter, the company completed the acquisition of SYNQ3. Together, the companies will be the “largest provider of voice AI for restaurants with over 10,000 active locations.”

In addition, partnerships with leading brands in various industries such as Nvidia (NVDA), Qualcomm (QCOM), Hyundai (HYMTF), Chipotle (CMG), Samsung, Mercedes-Benz, Pandora and others underline its strong market position.

Looking ahead, analysts predict SoundHound’s revenue will increase by 53.2% in 2024 and 46.6% in 2025. Analysts expect losses to narrow to $0.32 per share by 2024 and further decline to $0.21 by 2025.

The company expects revenues of between $65 million and $77 million in 2024. With a price-to-earnings ratio of 25.1 times its expected 2024 revenues, SOUN stock looks expensive. However, given the company’s explosive growth prospects in the speech AI market, it could be worth paying the premium.

What does Wall Street say about Soundhound AI?

Overall, SOUN stock is a “moderate buy” on Wall Street. Of the six analysts covering SOUN stock, four rate it a “strong buy,” while two rate it a “hold.” The stock has an average price target of $7.17, implying 15.6% upside potential from current levels.

In addition, DA Davidson analyst Gil Luria has given a high price estimate of $9.50, which means the stock can rise by 53.2% in the next 12 months. The analyst believes that SoundHound’s outstanding technology gives the company an edge in the AI ​​customer service industry.

The conclusion about SOUN

SoundHound AI operates in a tough competitive environment as major tech giants like Alphabet (GOOGL), Amazon (AMZN), and Apple (AAPL) dominate the speech recognition market. Still, as DA Davidson analyst Luria explained, SoundHound AI has a competitive advantage as a frontrunner in the AI ​​customer service business. The company’s innovative speech recognition technology, strategic partnerships, and commitment to growth make it an attractive long-term investment opportunity for those interested in AI and emerging technologies.

The company is not yet profitable, but that could change soon if the company continues to grow its revenue at this pace. However, as a penny stock, SOUN carries risks, so investors should conduct thorough due diligence before considering this penny stock.

As of the date of publication, Sushree Mohanty had no position (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.