Artificial intelligence continues to bolster the technology sphere, with SoundHound AI (NASDAQ:SOUN) representing one of Thursday’s beneficiaries. Specializing in voice and speech recognition, SOUN stock is popping higher off Cantor Fitzgerald’s upgrade. Still, the company trades at a rich premium to revenue, thus warranting caution.
Earlier today, analyst Brett Knoblauch wrote in a research letter to clients that the recent weakness in SOUN stock presented a more palatable valuation. “When we downgraded shares on [March 21], we thought downside risk far outweighed upside risks. Now, we believe both downside risk and upside risk are more even which, in our view, warrants a change to our rating.”
For clarity, Knoblauch still acknowledged that SOUN stock trades at an elevated valuation relative to the broader software market. But the analyst boosted his rating to “neutral” assessment from the previous “underweight.” Knoblauch maintained the price target of $4.90, implying about 9% upside from Wednesday’s close.
Beyond the valuation argument, the analyst laid out several catalysts that could boost SOUN stock. They include a “meaningful” acceleration in business fundamentals. Late last month, SoundHound announced that its voice AI system will be integrated into vehicles in Japan.
Valuation Still a Concern for SOUN Stock
With the vote of confidence, SOUN stock appears a compelling – albeit still speculative – opportunity. However, one major roadblock is that the valuation is still rich.
According to investment data aggregator GuruFocus, SOUN stock currently trades at a trailing-year sales multiple of 24.62x. That’s higher than 95.76% of enterprises listed under the software industry, which features a median valuation of 2.25x.
As a counterpoint, one of the bullish arguments for SOUN stock is that the underlying enterprise should see significant top-line expansion. Data compiled by Yahoo Finance reveals that experts project current fiscal year revenue to hit $68.6 million. If so, that would represent 51.5% growth from last year’s tally of $45.87 million.
What’s more, in fiscal 2025, analysts on average anticipate revenue of $102.76 million. Under that forecast, the growth rate would clock in at 47.9% above projected 2024 revenue. In addition, the most optimistic sales target for fiscal 2025 calls for sales of $105.72 million.
Even at that lofty target, the revenue per share – assuming December 2023’s shares outstanding (on a diluted average basis) count of 229.265 million – would come out to 0.46x. Dividing this ratio by the current share price of $4.62 spits out a revenue multiple of roughly 10x.
That’s still rich compared to the software industry, which explains Knoblauch’s measured rating upgrade.
Why It Matters
Currently, Wall Street analysts rate SOUN stock as a consensus moderate buy. However, the assessment is rather contested, breaking down as four buys, one hold and one sell. Still, the average price target does stand at $7.15, implying almost 55% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
