Up 176% YTD, How Much Higher Can This Penny Stock Rise?

Penny stocks receive relatively little attention, even though some of them have strong fundamentals and the potential to be extremely profitable. This year, the artificial intelligence (AI) wave boosted nearly every industry. However, one pure-play AI company, SoundHound AI (SOUN), has been overlooked, primarily because it is a penny stock.

However, this name has finally gained some attention after semiconductor market leader Nvidia (NVDA) disclosed a $3.7 million investment in SOUN via its 13F filing. Though Nvidia did not disclose the reason for the investment, the chip giant's involvement in SoundHound sparked investors' interest.

Prior to this, SOUN stock had already rallied 20% last year, thanks to its strong quarterly results. As a result, March has just begun, and the stock is already up 176% year-to-date, outpacing the broader market by a huge margin. Let's look at what the company is doing well, and why Wall Street is so optimistic about Soundhound AI stock.

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SoundHound AI Reports Another Robust Quarter

SoundHound AI (SOUN), valued at $1.4 billion, is a small AI company that offers voice AI solutions in the form of customized conversational experiences to businesses around the world.

In the fourth quarter, SoundHound's revenue increased by an impressive 80% to $17.1 million compared to the same period last year. Furthermore, its total subscription and booking backlog has doubled to $661 million. Booking backlog refers to contractual revenue that has not yet been recognized as revenue, but represents future potential revenue.

While the company's revenue has increased from $21.1 million in 2021 to $45.9 million in 2023, it is still not profitable. However, the company has been working to cut down its GAAP (generally accepted accounting principles) net losses. In Q4, losses were $0.07 per share, compared to $0.15 in the same quarter last year. The company's adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) improved 80% from Q4 2022. 

For the full year, the company reported a GAAP net loss of $0.40 per share, down from $0.74 per share in 2022.

Management anticipates revenue between $63 million and $77 million in 2024. The company also expects revenue to exceed $100 million by 2025, resulting in a positive adjusted EBITDA. By comparison, analysts predict revenue growth of 51.5% year-on-year to $69.5 million in 2024, followed by a 47.8% increase in 2025. Furthermore, analysts expect losses to narrow to $0.21 per share in 2025.

On the Q4 earnings call, CEO Keyvan Mohajer stated that the “introduction of large language model and generative AI” was a positive development for the company. While other tech companies struggled to build an AI model, it was easier for SoundHound, given its years of experience. 

He went on to say, “SoundHound Chat AI has rapid adoption. Launched in early 2023, we are one of the first companies to show how generative AI could be integrated into a voice assistant.”

In 2023, besides SoundHound Chat AI, the company unveiled a wide array of products. These include SoundHound Chat AI for Automotive, Dynamic Interaction with Generative AISmart Answering, Vehicle Intelligenceand Employee Assist for restaurants, among others.

In addition, the company formed strategic partnerships with various companies around the world to launch its products. Soundhound currently has "30 million businesses" in its "near-term addressable market."

Turning to the balance sheet, the company ended the quarter with $95.3 million in cash and cash equivalents and $84.3 million in long-term debt. While the company's growth prospects and AI capabilities are boosting its stock, it must focus on generating profits and free cash flow to manage its debt levels.

How High Can SOUN Rise in 2024?

With this year's explosive surge, SoundHound is trading close to analysts' average price target of $6.97. Following its impressive quarterly results, Wedbush analyst Dan Ives maintained his “buy” rating on the stock, with a Street-high target price of $9. This implies that Soundhound stock has the potential to run as much as 53.5% higher in the next 12 months. 

In the analyst community, all six analysts covering SOUN stock rate it a "strong buy."

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The Bottom Line on SOUN Stock 

SoundHound’s CEO believes that AI customer service will become increasingly important for all businesses in the future. This opens up more opportunities for SoundHound AI as the AI era progresses.

Because the company remains unprofitable, it can be valued based on sales. At 25 times forward projected sales for 2024, the stock appears pricey - but given the rapid advancement of AI and Soundhound's projected growth, it appears to be a fair play.

If the company continues to report strong consecutive quarters, the stock is poised to rise, potentially exceeding the Street-high target price of $9. However, based on the company's AI-led efforts and strategies, I believe this is a good investment not only for 2024, but for the long term. 

That said, keep in mind that Soundhound AI is a penny stock that will likely experience significant volatility until its financials improve. As a result, due diligence is required before making any investment decisions.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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