Analysts Revamp SoundHound AI stock price targets ahead of earnings

There’s a frenzy happening in the stock market surrounding artificial intelligence.

Initially, optimism that generative AI apps like OpenAI’s ChatGPT would cause a surge in spending on infrastructure led to stocks like Nvidia, the major maker of semiconductor chips for use in AI, and Super Micro, a seller of high-end servers, to soar. 

Now, optimism is spreading to include second-tier stocks that could benefit as AI investment translates into real-world applications.

One stock riding that wave of interest is SoundHound AI, a pure-play AI company focused on conversational, voice-driven solutions for customer service, such as restaurant drive-throughs.

Last year, SoundHound AI shares rallied 225% from their March lows to last June’s highs, and then its stock price went dormant, trading mostly sideways until recently. In mid-February, Nvidia’s disclosure that it owns SoundHound AI stock reignited interest, causing its shares to surge another 193%.

The rapid runup in SoundHound’s stock price has caught the attention of one analyst who updated his thoughts ahead of the company’s earnings results, set to be reported on Feb. 29.

SoundHound AI is riding a wave of interest in voice-powered AI applications.

Bloomberg/Getty Images

A tidal wave of AI activity

The concept of machines thinking for themselves isn’t new. The mathematician and computer scientist Alan Turing explored how to design AI computers in the 1950s, and legendary research firm Rand Corp. wrote the first AI computer program in 1956. Books and movies based on the premise have entertained us for decades.

While AI’s potential has been considered for all those years, only recently has AI use become mainstream. OpenAI’s ChatGPT became the fastest app to sign up one million users when it launched in December 2022, opening the door to widespread use of AI to quickly analyze, parse and create content from large datasets.

Related: Analyst who forecast Nvidia stock could exceed $750 revamps target

That potential has inspired a flurry of AI spending across most industries. Banks like JP Morgan Chase are using AI to hedge risks, drug companies are exploring AI’s use in drug development, manufacturers are seeing whether AI can improve quality and inventory management, and retailers are experimenting with it as a tool for reducing theft. Governments are also in on the action, assessing AI’s potential on the battlefield.

AI interest has become so widespread that it’s taxing existing network infrastructure, leading cloud service providers and enterprises to invest big money to upgrade to more powerful and energy-efficient equipment. That spending, including by hyperscalers like Amazon, Google, Microsoft, and Oracle, has caused sales and profit to skyrocket at Nvidia and Super Micro.

Surging demand has also prompted companies to invest in next-generation solutions. 

For instance, this year, Advanced Micro Devices launched its latest graphics processing unit, or GPU, solution, the MI300X, to compete head-to-head with Nvidia. 

Meanwhile, Nvidia is marrying software to its GPUs, creating solutions that can improve network performance and enable AI applications to reside on desktops rather than in the cloud.

Nvidia (and others) make a bet on AI’s future

Nvidia isn’t only putting money back into its own products. It’s also created an investment portfolio to invest in other companies that could benefit from increasing AI demand.

The company disclosed its holdings in that portfolio for the first time in mid-February. Its 13F filing with the Securities and Exchange Commission showed it owns Arm Holdings and SoundHound shares.

Related: Nvidia’s maiden 13F filing sends AI-focused tech stock soaring

Nvidia’s $47.3 million stake (1.96 million shares) in Arm Holdings isn’t surprising, given that it tried to acquire Arm outright until regulators blocked the deal in 2023. Arm Holdings had also previously disclosed that Nvidia (and others) were participating in its IPO last year.

The stake in SoundHound, however, caught investors off guard. While Arm Holdings is a massive, well-known designer of chips, SoundHound is an unprofitable tiny upstart with just $13 million in revenue in the third quarter.

Nvidia isn’t alone in thinking that SoundHound AI is worth a small bet (Nvidia’s 1.73-million-share stake was valued at just $3.67 million at the time of its filing). According to Northland Capital Markets Analyst Michael Latimore, Samsung and Oracle own some shares.

SoundHound’s smart ordering AI program for restaurants became available on Oracle’s cloud in 2023.

Analyst updates opinion on SoundHound AI

Latimore has been a fan of SoundHound, but the straight-line higher in its share price hasn’t been lost on him.

On Feb. 28, one day before SoundHound is scheduled to disclose its fourth-quarter financials, he cut his rating on the stock to market perform from outperform. In Wall Street speak, that’s essentially a reduction in rating to hold from buy.

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Latimore remains a fan, though, given that he boosted his stock price target to $5.50 from $4 per share. The higher target is encouraging, but it’s below where SoundHound currently trades following its explosive move higher.

Valuation is one reason Latimore reduced the rating on SoundHound AI to market perform. In a note to clients, he points out that top software-as-a-service technology stocks trade at about 14-times estimated 2024 revenue, while SoundHound trades at 28-times.

Latimore’s new price target is based on a multiple of 13 to 14 times revenue. He says that if SoundHound’s AI solution gains a foothold in the restaurant market, organic revenue could climb 48% in fiscal 2025.

SoundHound AI’s website lists Jersey Mike’s, Krispy Kreme, and White Castle as brands experimenting with its voice-driven AI solution.

The restaurant market is potentially eager to test AI-powered order takers. Latimore says that SoundHound has demonstrated cases of an 85% order completion rate that outperforms humans using its technology. Given the high costs associated with staffing restaurants, automating order-taking could be a big win for restaurants’ bottom line.

Investors will want to see what the company says about this market when it reports its earnings. Wall Street estimates SoundHound AI will report fourth-quarter revenue of $17.8 million and a loss of six cents per share. They’re targeting revenue of $69.3 million and a loss of 25 cents per share for the full year.

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