Analysis

SoundHound AI Is the Most Undervalued Artificial Intelligence (AI) Stock to Buy Now

Find out why SoundHound AI might be your next top stock pick. It’s hard to find undervalued stocks in the red-hot AI market but this one might deserve that tempting description.

SoundHound AI (SOUN -1.00%) has had quite the roller-coaster ride this year. But there’s more excitement ahead, and I say it’s time to buckle up for the next climb.

Despite its negative earnings and eyebrow-raising valuation ratios, SoundHound AI stands out as a diamond in the rough. The voice-control specialist’s stock is currently down by a significant margin from its previous highs, but don’t let that discourage you. Here’s why I see a big future for this little artificial intelligence (AI) powerhouse, and why I’d still call it “undervalued” today.

A closer look at SoundHound AI

SoundHound AI focuses on voice AI and conversational intelligence technologies, fields that are becoming increasingly vital in our tech-driven world. With a backlog of long-term contracts totaling a whopping $682 million, this company has a clear path to future income that seems largely ignored by the current market price.

Yes, the stock has more than doubled from early February, when AI giant Nvidia (NVDA -0.36%) announced a small investment in SoundHound AI stock. But it stands far below the nearly $14 peak price recorded shortly after the initial public offering (IPO) in the inflation-burdened spring of 2022.

The market buzz around Nvidia’s investment was more than hype, by the way. It was a nod from a proven tech giant recognizing SoundHound AI’s long-term potential. While the stock has since cooled off, the company’s fundamentals are anything but frosty.

Financial metrics and growth prospects

Despite its current unprofitability and high valuation ratios, SoundHound AI’s financial health remains robust. The order backlog mentioned above amounts to nearly $700 million as of Q1 2024, up from $336 million in the year-ago period. This backlog reflects committed client contracts and realistic adoption estimates for subscription services, providing a solid foundation for future revenue.

A skyrocketing balance in this column suggests that customer interest for SoundHound AI’s services is high and rising, and the backlog should convert into revenues over time. The stock is worth about 1.9 times that backlog today.

Comparing backlog to price-to-sales ratios can be misleading because backlog represents future potential revenue, whereas price-to-sales is based on current revenue.

So it’s not an entirely fair apples-to-apples comparison to price-to-sales figures, where this stock looks expensive with a 25.5x multiple — it should take years to complete the revenue-generating services. Still, most growth stocks would sell their proverbial mothers for a backlog like that.

Moreover, SoundHound’s comes with a robust financial base. With a cash balance of $180 million and only $85.5 million of long-term debt, SoundHound is well-equipped to continue its growth trajectory. This solid foundation is crucial to the hypergrowth phase of a hungry upstart, allowing the company to take bottom-line losses while optimizing its top-line growth trajectory. In other words, that massive order backlog wouldn’t be what it is without SoundHound AI’s willingness to finance this business stage through debt papers and open-market stock sales.

Positioned for long-term growth

SoundHound AI might seem like a wild ride, but that’s part of its charm. Sure, the stock has taken some steep dives, but the fundamentals paint a promising picture. The company’s backlog of long-term contracts is substantial, and its strategic moves have positioned it well for future growth.

Investors should be prepared for a bumpy journey, but the potential rewards should be worth the uncomfortable ride. SoundHound AI’s innovative technology, coupled with its impressive backlog, suggests that this growth story is just getting started — nearly two decades after the company’s founding.

For those willing to embrace a bit of excitement and hold on through the twists and turns, SoundHound AI could be the ticket to market-beating returns. It’s not a classic value stock, but it’s hard to find a better buy in the overheated AI sector right now. I’d certainly buy SoundHound AI stock long before doubling down on Nvidia’s lofty valuation.

Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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