Expectations for growth this year are soaring for SoundHound AI (SOUN 2.35%). Last year, analysts were anticipating just 30% revenue growth. This year, analysts believe sales could nearly double. Some investors think shares are overly expensive at 36 times sales. But the charts below paint a different picture.
SoundHound AI’s growth could justify the valuation premium
As a pure-play company betting on voice-driven artificial intelligence (AI) applications, SoundHound AI should benefit from a rising tide in AI spending. By 2032, analysts estimate the voice AI market in general could be worth more than $40 billion. For comparison, SoundHound AI’s revenue last year totaled just $85 million.
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Of course, even high-growth companies can be overvalued. That certainly might be the case with SoundHound AI given shares trade at 36.5 times trailing sales. But this year, analysts believe sales should just by around 96%. Next year’s estimates are much lower, but sales are still expected to grow by nearly 20%. SoundHound AI’s end markets, meanwhile, are expected to grow by roughly 30% annually.
SOUN PS Ratio data by YCharts
For the next five to 10 years, SoundHound AI has an opportunity to grow sales at a double-digit pace. At times, annual sales growth might reach the triple digits. When looking ahead, the initial 36.5 times sales ratio doesn’t look nearly as expensive. Even just factoring in the next 12 months of expected growth, SoundHound AI trades at just 21.9 times forward sales. Add in a few more years of 20% to 30% top-line growth and SoundHound AI’s valuation starts to look fairly reasonable.
There are a lot of risks to this story. SoundHound AI’s relatively small research and development budget might hinder it long-term versus better-financed big tech competitors. And over the short term, fluctuating expectations for growth could have huge effects on the stock price. But if you’re willing to look many years down the road and remain patient, SoundHound AI shares aren’t as expensive as they seem.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.