SoundHound AI: Potential 'Magnificent Seven' Outperformer?

The article suggests that smaller AI companies could outstrip the "Magnificent Seven" in the coming years. The "Magnificent Seven," a term coined by Jim Cramer of CNBC, refers to the most prominent big tech companies.

An investment in this group over the last five years would have resulted in considerable returns. However, the question now is whether they can sustain this performance moving forward. While the AI infrastructure expansion trend still has potential, the author suggests investors consider other compelling options besides the Magnificent Seven.

SoundHound AI's Potential

SoundHound AI (SOUN-2.48%) is one company that many believe could thrive. Although smaller than the "Magnificent Seven," its size allows for rapid growth if product demand exists. Given the widespread adoption of AI across industries, SoundHound AI presents an interesting stock choice, with the potential to outperform the Magnificent Seven over the next half-decade.

SoundHound AI's Technology

SoundHound AI specializes in combining AI with audio. It offers superior audio recognition technology and AI voices that sound human-like, unlike typical computer-generated voices. While not a novel concept, as seen with Apple's Siri and Amazon's Alexa, SoundHound AI's products demonstrate improved performance and accuracy compared to their counterparts.

There's a substantial market for human-to-AI interaction, including applications in drive-thrus, financial institutions, and healthcare billing, replacing traditional human-to-human interaction. SoundHound AI's product has seen broad deployment in these areas, leading to significant company growth.

Financial Performance

SoundHound AI's Q2 revenue saw a 217% year-over-year increase, reaching $42.7 million and setting a new company record. Key announcements during the quarter included the addition of seven of the top 10 global financial institutions as clients, along with renewals or upsells with four of these clients.

SoundHound AI's stock exhibits substantial momentum, with management expressing optimism about its adoption. CFO Nitesh Sharan anticipates organic growth of at least 50% in the foreseeable future. This forecast is encouraging for investors, especially given SoundHound AI's previous acquisitions to strengthen its offerings. Organic growth, derived from existing businesses, reaching 50% or higher is noteworthy. The only Magnificent Seven stock with comparable long-term growth is Nvidia, but its growth rate has been declining.

Valuation Concerns

While SoundHound AI has the potential to outperform, its valuation is a concern. With a price-to-sales ratio exceeding 50, the stock is relatively expensive, suggesting that some future growth is already factored into the price. However, if SoundHound AI achieves a 50% or higher organic growth rate over the next five years, the current price could be considered a bargain.

SoundHound AI possesses considerable potential if its technology continues to gain widespread adoption. However, there's no guarantee of its ultimate success, as larger companies could introduce competing products. As long as investors acknowledge the risk, SoundHound AI could be a compelling investment. Whether SoundHound AI surpasses the Magnificent Seven remains to be seen, but it has a significant opportunity to do so.