Summary

• At a price-to-sales ratio of 70 and no free cash flow or profitability, SoundHound AI's valuation reflects speculative sentiment, with a negative margin of safety of -45%.

• Despite unique voice AI technology and growing partnerships, fierce competition and operational dilution weaken its long-term growth case.

• While 100% revenue growth in FY2025 is plausible, sustaining momentum depends on sentiment. For long-term investors, SoundHound may be valid as a high-risk, low-weight speculative play.

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Investing in novel technologies and emerging companies can be exciting, rewarding, and lucrative. However, valuation remains the fundamental tenet of investing, and just six months ago a very valid deal could have been sought for SoundHound AI (NASDAQ:SOUN) stock. Now, the deal has changed. At a price-to-sales ratio of around 70, all of 2025's robust revenue growth expectations are fully priced into the stock, and I expect significant volatility to follow soon as growth tapers in 2026 and beyond. For those looking for a very long-term speculative investment in the future of voice AI, returns could be formidable, but I expect little alpha at the present valuation and an unpredictable road ahead. A potential acquisition is not unlikely, but remains a speculative reason to invest in the company at this stage.

Operations & Outlook

SoundHound AI is at the forefront of the AI revolution as a leading innovator in voice AI and conversational intelligence. Its key products include smart answering, smart ordering, and dynamic interaction, as well as SoundHound Chat AI. These offerings create a comprehensive and intuitive automation experience for customers, reducing the reliance businesses have on human workforces and, hence, reducing operational costs. SoundHound AI has partnerships with Hyundai (OTCPK:HYMTF), Stellantis (STLA), and Mercedes-Benz (OTCPK:MBGAF), among others in the automotive sector, as well as having its products deployed in 10,000 restaurant locations like Chipotle (CMG) and Krispy Kreme (DNUT)—it also enjoys customer service and retail customers and provides its services for IoT devices.

It's not unreasonable to posit that SoundHound AI will eventually get acquired. Indeed, its current market cap of around $5.5 billion is not too expensive for a Big Tech company to consider, but the question is whether any financial management team of a conglomerate will be willing to pay such a high price-to-sales ratio for the enterprise. They might be if the accretive effects over time through a moat in voice AI establish a much higher return on investment related to intellectual property harnessed at a larger scale. However, buying SoundHound stock for future acquisition-target potential is somewhat speculative, and if such an event does not take place, downside volatility is more likely than upside momentum in the medium term due to valuation factors.

Valuation & Financial Commentary

Why anyone would buy a stock trading at a price-to-sales ratio of between 60 and 100 is beyond me, yet that is the scenario we are faced with regarding SoundHound AI. The company has no free cash flow and no net income, so it will inevitably be depending on debt and equity raising to finance its operations, with the equity side of financing more directly affecting shareholders in the near term. Diluted shares outstanding for SoundHound AI have increased from 11.6 million in December 2019 to 306.8 million as of the last trailing 12 months. This represents a compound annual growth rate of 126.8%. This is common for young companies, but given that the business was established in 2005, it's had time to stabilize earnings and net income previously without success.

Data by YCharts

The company does have a substantial revenue growth opportunity over the next year or so. SoundHound operates in a growing ~$150 billion total addressable market based on my research and is transitioning to recurring revenue. Moreover, it has driven its customer diversification up substantially recently—its top customer used to account for 72% of its revenue in 2023, and it is now down to just 12%. That indicates strong market-penetration momentum, and it does support a potential total revenue of over $150 million for Fiscal 2025, but I do worry about how the company will fare in the long term, given the incredible competition that is already present and will likely intensify over time.

The voice AI space is already dominated by major players like Amazon's (AMZN) Alexa, Google's (GOOGL) (GOOG) Assistant, and Apple's (AAPL) Siri, who indirectly corner large segments of growth SoundHound AI would otherwise be able to capture. However, SoundHound's Deep Meaning Understanding technology is unique compared to other AI platforms due to its advanced natural language understanding with real-time processing capabilities. Competitors currently operate with sequential processing; this means speech-to-text and then natural language processing. Therefore, SoundHound's technology is currently faster, but this moat is unlikely to last as AI capabilities scale and new patents are developed by Big Tech and other emerging players. As a result, I find the current price-to-sales ratio of nearly 70 for SoundHound AI stock to be irrational, speculative, and full of risk.

As the valuation has now peaked near a price-to-sales ratio of 100, we may rationally take an average of its total price-to-sales ratios over the course of its public market membership and use the midpoint of these and the current price-to-sales ratio as a fair multiple to incorporate high future sentiment into the analysis whilst also being conservative. At a price-to-sales ratio of 45, the company would have a market cap of $3.03 billion, given current trailing 12-month revenues of $67.3 million. The company's current market cap is $5.54 billion, indicating a negative margin of safety of -45% for investment even under optimistic assumptions incorporating sentiment factors.

Data by YCharts

Counter-Analysis

The most obvious counter to my Strong Sell thesis is that SoundHound could very likely achieve around 100% revenue growth in Fiscal 2025, which could sustain sentiment and even mean that the stock is momentarily undervalued relative to previous sentiment in the near term. However, these market psychology tactics to establish and maintain growth appear to be very weak foundations to invest from. As is often the case in such speculative assets, a simple statement from a celebrity can alter the direction of the price.

Therefore, while it might be tempting to view SoundHound as a one-year sentiment-value play, this is not a sophisticated way to allocate capital.

Another way of looking at this is that the company does not deserve your capital at its present market cap because it is overvalued. Therefore, an under-appreciated growth company would be much more deserving of the market's money and investors allocating capital to these businesses would be rationally supporting their workforces, business development, and market penetration. On the other hand, allocating capital to SoundHound AI at its present valuation will likely lead to medium-term investment losses as a result of an 'irrational' action being committed.

For very long-term oriented investors, I can see some validity to the argument that SoundHound AI is a speculative investment in the future of voice AI. However, there is considerable uncertainty in this venture-style investment strategy related to market changes, new competition factors that emerge, and potential operational weaknesses that are unforeseeable now and not protected from by any meaningfully lasting moat. I suspect that investors who choose SoundHound AI as part of this strategy will want to balance it with other players in the emerging AI and quantum computing market, and hold each investment at a minuscule weight in their total asset base.

Conclusion: Strong Sell

Whether SoundHound AI will go up or down in the next year will have to be seen in due course. However, even if gains do occur, I consider this to be the result of risky speculation rather than risk-mitigated value and growth investing. Around July, this company would have likely been a Buy, as its price-to-sales ratio was under 20. Now, with a price-to-sales ratio of 70 and an unlikely stable 100%+ revenue growth rate for many years, next year's big revenue up ramp is already fully priced into the stock valuation. Therefore, this is a time to sell SoundHound AI stock aggressively, not buy more or initiate a position.