Voice AI And Edge Devices Will Expand Global Markets

Key Takeaways

• Generative AI integration and rapid ecosystem adoption are enabling SoundHound to capture market share across industries, boosting recurring revenues and accelerating growth.
  
• Strength in embedded conversational AI and operational leverage positions SoundHound for margin expansion, robust long-term performance, and leadership as digital transformation accelerates.
  
• Increased competition, persistent losses, and elevated operating costs from recent acquisitions raise significant concerns around SoundHound AI's future profitability and margin recovery.

Catalysts

Develops independent voice artificial intelligence (AI) solutions that enables businesses across automotive, TV, and IoT, and to customer service industries to deliver high-quality conversational experiences to their customers in the United States, Korea, France, Japan, Germany, and internationally.

• While analysts broadly agree that the launch of SoundHound's voice commerce ecosystem opens new monetization opportunities, the rapid adoption by both OEMs and restaurants combined with entry into services like reservations and parking could make this pillar a much larger and recurring revenue stream than currently anticipated, supporting a substantial uplift in both revenue and net margins as the platform achieves network effects.
  
• Analyst consensus credits SoundHound's generative AI integration for improved product royalties and margins, but this underestimates the impact of the Polaris foundation model's superior speed, accuracy, and multilingual capabilities, which are already displacing big tech incumbents and could allow SoundHound to capture share across global enterprise, automotive, and IoT markets at a rate faster than anticipated, driving accelerated revenue growth and margin expansion.
  
• The company is exceptionally well-positioned for the forthcoming surge in global connected devices and edge AI, as demand for embedded, on-premise conversational AI will likely make SoundHound's technology core to a vast array of consumer electronics, automobiles, and IoT endpoints, substantially enlarging the company's addressable market and supporting long-term topline growth.
  
• Secular momentum toward AI-driven digital transformation across enterprises is fueling cross-industry adoption of voice AI in sectors as diverse as healthcare, energy, financial services, and hospitality, with SoundHound's expanding customer wins and renewals pointing to robust multi-year ARR and high SaaS-like gross margins as use cases proliferate.
  
• The accelerated improvements in inference cost reduction and automation, combined with a demonstrated ability to successfully integrate, scale, and upsell recently acquired businesses, could drive a structural leap in operational leverage, hastening the timeline to material EBITDA profitability and enabling SoundHound to outpace the industry's margin expansion expectations.

SoundHound AI Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on SoundHound AI compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming SoundHound AI's revenue will grow by 46.8% annually over the next 3 years.
• Even the bullish analysts are not forecasting that SoundHound AI will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SoundHound AI's profit margin will increase from -184.4% to the average US Software industry of 13.2% in 3 years.
• If SoundHound AI's profit margin were to converge on the industry average, you could expect earnings to reach $42.8 million (and earnings per share of $0.09) by about August 2028, up from $-188.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 259.6x on those 2028 earnings, up from -21.5x today. This future PE is greater than the current PE for the US Software industry at 39.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

SoundHound AI Future Earnings Per Share Growth

Risks

• The company's GAAP gross margin declined year-over-year to 37% due to the impact of recent acquisitions and the low-margin nature of some acquired contracts, and management acknowledges that a return to pre-acquisition gross margin levels above 70% will take 18 to 24 months, which could put persistent downward pressure on gross margins and profitability.
  
• Despite revenue growth, SoundHound AI continues to report substantial losses, with an adjusted EBITDA loss of $22.2 million and a non-GAAP net loss of $22.3 million in the latest quarter, making the path to sustained profitability uncertain and increasing the risk of future dilution or constrained growth investment.
  
• The AI and voice solutions space is experiencing intensifying competition from big tech incumbents and new entrants, and the CEO specifically called out an increase in competitors, implying that pricing pressure and commoditization could erode SoundHound's future revenues and margins.
  
• Restated macroeconomic headwinds, including softness in the auto segment attributed to "complex geopolitical dynamics" and economic uncertainties, demonstrate that demand from key customer verticals like automotive and restaurants is vulnerable to global events, which could dampen revenue growth if instability persists.
  
• SoundHound's expansion via acquisitions (such as Amelia and SYNQ3) has resulted in notable increases in R&D and sales and marketing expenditures, reflected in a 66% and 117% year-over-year increase respectively, meaning elevated operating expenses may continue to weigh on both operating margins and net margins for the foreseeable future.

Valuation

• The assumed bullish price target for SoundHound AI is $18.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SoundHound AI's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $323.4 million, earnings will come to $42.8 million, and it would be trading on a PE ratio of 259.6x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $10.11, the bullish analyst price target of $18.0 is 43.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.