There are many different areas that artificial intelligence (AI) has the potential to disrupt. One application that is grabbing attention at the moment is voice recognition software.
While there are a host of major players developing AI-powered voice assistants, SoundHound AI (SOUN 0.60%) is fetching the majority of media coverage thanks to its relationship with Nvidia.
Shares of SoundHound AI have soared so far in 2024 -- up a whopping 200%. Investors who bought at all-time lows last January and held on for the ride have undoubtedly made some game-changing profits.
Let's dive into SoundHound AI and assess whether the company has the potential to break out and make you a millionaire.
Understanding SoundHound AI
Speech recognition has many different use cases. SoundHound AI's technology is primarily used in vehicles, restaurants, and smart home appliances. With a customer roster that includes Qualcomm, Toast, Block, and Hyundai, SoundHound AI has proven that it can attract some of the world's leading brands.
What investors may not understand is that many big tech companies have invested in businesses similar to SoundHound AI. Two of Apple's more notable acquisitions include voice assistant Siri and music recognition app Shazam. Apple has been integrating Siri throughout its line of hardware products for many years, signaling the company is betting big on the proliferation of voice-powered AI.
Moreover, both Amazon and Alphabet leverage voice-recognition software in their lines of smart home appliances. This makes sense, as voice control and AI play integral roles in the Internet of Things (IoT).
With an estimated addressable market of $50 billion, SoundHound AI has a greenfield opportunity to seize market share.
Image source: Getty Images.
Despite its potential, SoundHound AI is still small
Some of the hottest areas fueling the AI narrative at the moment include enterprise software, semiconductors, and accelerated computing. By contrast, AI-based voice recognition is still small relative to other generative AI applications.
For the year ended Dec. 31, 2023, SoundHound AI generated $45.9 million in revenue. While this was an increase of 48% year over year, it's obvious that the company is still up and coming. A combination of top-line growth and disciplined cost controls helped the company trim losses by half on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis last year.
This is an encouraging display of financial momentum -- but with only $95 million of cash on the balance sheet, SoundHound AI is going to need to prove that it can turn its burn into positive free cash flow sooner rather than later.
Could SoundHound AI help you become a millionaire?
SoundHound AI is forecast to increase revenue approximately 50% in both 2024 and 2025, according to Yahoo Finance. Given last year's sales of roughly $46 million, this implies SoundHound AI will reach $100 million in revenue by 2025.
For this analysis, I'll assume that SoundHound AI can keep growing revenue at 50% through 2030. Should the company achieve this level of growth, this would result in $780 million of sales by 2030.
Additionally, SoundHound AI stock recently traded at a price-to-sales (P/S) ratio of 29.3. Assuming this normalizes to a more reasonable level of 15, for example, SoundHound AI's future market cap would be around $11.7 billion.
This is roughly 550% higher than the company's current market cap. This means that a hypothetical investment of $100,000 would be worth $650,000 by 2030 -- far from $1 million.
It's important for investors to realize that this analysis was merely a fun exercise in numbers. Given the potential of voice recognition software, and the secular themes fueling AI, it's not unreasonable to think that SoundHound AI could grow its top line by 50% for the next several years. However, as the competitive landscape intensifies and considering the long-run macroeconomic outlook is unknown, I view this as highly unlikely.
If you are looking to build wealth, I'd stay away from speculative options such as SoundHound AI. Instead, a more prudent approach is to make monthly contributions to passive vehicles such as index funds. Alternatively, you could also invest in larger companies that are already established leaders in growth sectors such as AI. In either case, you'll be exposed to high-quality, cash-flow-positive businesses -- some of which pay dividends or conduct share buybacks.
So while SoundHound AI represents an intriguing opportunity, the company will need to grow at almost unprecedented rates for many consecutive years in order to make you a millionaire.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Block, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Block, Nvidia, Qualcomm, and Toast. The Motley Fool has a disclosure policy.
