Artificial Intelligence corporation's shares skyrocketed by 217% from November 2021 up until now. Is a stock split imminent for shareholders in 2025?
I've been talking about SoundHound AI (-1.16% from SOUN) quite a bit this year. In the early months of 2024, the company bagged a substantial investment worth millions from Nvidia, the leading provider of artificial intelligence (AI) graphics processing units (GPUs) worldwide. I thought this partnership was a strong endorsement for their small AI business at the time.
Things have taken an interesting turn in recent times. Since November started, SoundHound's shares have seen a significant surge in value, increasing approximately 217%. The question now is, will the company consider a stock split in 2025? You might find the answer surprising.
Two reasons why this AI stock is gaining popularity
AI is currently the trendiest market segment around. Nvidia, a major player, holds the second-highest market value globally. The shares of most AI companies experienced a significant growth spurt in the initial quarters of 2024. Somehow, SoundHound's shares seemed to fly under the radar. Although shares rose following Nvidia's $3.7 million investment announcement in Q1, they failed to maintain momentum for the remainder of the year – until now.
What has captivated the market's attention? Perhaps SoundHound's modest market cap – the company was valued under $2 billion at the beginning of November – suddenly became an advantage. There aren't many small, publicly traded AI companies left, which could explain why SoundHound managed to maintain a low profile. However, with its current valuation exceeding $5 billion, those days appear to be behind us.
The primary reason behind SoundHound's recent surge, though, is likely the significant growth in revenue expectations. This summer, quarterly revenue growth estimates hovered around 50%. Today, those estimates have nearly doubled to 96.7%. This substantial increase hints that SoundHound could now justify a higher price-to-sales (P/S) ratio than it did when expectations were lower. Moreover, it might indicate a more extensive and more enduring growth runway than many analysts anticipated.
SoundHound, as the name suggests, focuses on harnessing AI for the realm of sound. It has partnerships with fast food chains to streamline drive-through ordering, with consumer product companies for customer support, and with several vehicle manufacturers for voice recognition and AI assistants for drivers. Research suggests that this market is expanding at a rate of 15% to 20% annually. Yet, SoundHound's growth rates far outpace those of the industry, implying superior technology and market fit compared to its competition.
Currently, SoundHound's main rivals are likely Big Tech companies, all developing their voice AI platforms. But given its substantial patent portfolio and decades of operational experience, there's a chance that one of these tech giants could acquire SoundHound and integrate its patents into its own tech stack. The potential acquisition price would be minimal compared to these companies' spending power. What's more, SoundHound is currently meeting customer demand in the early stages of AI development. In these early days, SoundHound looks like it's on an encouraging trajectory.
SOUN PS Ratio data by YCharts.
Will SoundHound enact a stock split in 2025?
Although SoundHound's business appears promising, its stock is trading at a high 63 times sales. If sales keep growing at a breakneck pace, such a high multiple could still be justified. We'll have to wait and see.
But what about a stock split? Isn't one imminent for this hot stock? It seems unlikely, even after the recent surge. Even with its current valuation, shares trade between $10 and $15 – not high enough to typically warrant a stock split. If the company manages to maintain its valuation multiples and growth rates, however, there could potentially be a stock split a few years down the line. But for now, a stock split in 2025 seems highly unlikely.
The surge in SoundHound's share value could be attributed to the growing popularity of AI-focused companies, as well as the significant increase in revenue expectations. With quarterly revenue growth estimates approaching 100%, SoundHound's high P/S ratio might now be justified, suggesting a longer and more enduring growth runway than anticipated. Despite its promising business, a stock split in 2025 appears unlikely due to the stock's current trading range and valuation multiples. In the world of investing, keeping an eye on financial performances and market trends is crucial to making informed decisions.
