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Penny stocks are shares of companies with low market capitalization, low liquidity, and relatively high volatility. Investing in penny stocks can be highly speculative and risky, but it also offers the potential to earn significant returns.

One high-potential penny stock is SoundHound AI (SOUN), which has established itself as a major player in the field of artificial intelligence (AI) voice recognition and conversational intelligence. Founded in 2005, SOUN started its journey as a music recognition app. However, with the advancement of AI, the company has now embraced broader voice-enabled AI capabilities.

As it continues to innovate and expand, the company's financials have strengthened. SoundHound’s end to fiscal 2023, with a 47% year-over-year increase in total revenue and its smart growth strategies, impressed analysts. Recently, the company reported another strong quarter and a promising start to fiscal 2024, prompting investors and analysts to take this penny stock seriously.

SOUN stock has gained an impressive 192.5% year-to-date, massively outperforming the S&P 500 Index’s ($SPX) gain of 17.7%. Nonetheless, Wall Street believes SoundHound stock can rally much higher, given its commitment to growth. Let’s find out more.

SoundHound’s Financial Health Seems Sound

SoundHound AI has seen increasing adoption of its Houndify platform across various sectors, from automotive and restaurants to smart home devices, which has been driving its financial performance.

In the first quarter of 2024, total revenue of $11.6 million increased by a whopping 73% year-over-year. Cumulative subscription and bookings backlog growth of 80% from the year-ago quarter to $682 million drove this outstanding performance. Booking backlog refers to contract revenue that is yet to be recognized.

While SoundHound AI is focused on expanding its market presence, as with any growth stock, profitability remains a critical milestone. The company is working to reduce its losses; adjusted net loss per share fell to $0.07 from $0.08 in the prior year quarter.

Recently, SoundHound paid off $100 million in outstanding debt, leaving its cash balance at $180 million and no debt. This places the company in a strong liquidity position. CFO Nitesh Sharan stated, “We now have a capital structure free of debt, which will allow us to move even more nimbly to capture the increasing customer demand for our voice AI solutions."

Despite being a small company with a market cap of $1.7 billion, SOUN's ability to maintain and grow its market share in the face of stiff competition is a critical factor that investors should note. SoundHound also made some strategic acquisitions and partnerships over the last year that will continue to pay off in the long term.

In the first quarter, it closed the acquisition of SYNQ3. Combined, the companies will be the “largest voice AI provider for restaurants with over 10,000 active locations.”

Plus, its partnerships with leading brands in various industries, such as Nvidia (NVDA), Qualcomm (QCOM), Hyundai (HYMTF), Chipotle (CMG), Samsung, Mercedes-Benz, Pandora, and more, showcase its strong market position.

Looking ahead, analysts predict SoundHound’s revenue to increase by 53.2% in 2024 and 46.6% in 2025. Analysts expect losses to narrow to $0.32 per share in 2024, and reduce further to $0.21 in 2025.

The company expects 2024 revenue to range between $65 million and $77 million. Trading at 25.1x forward 2024 estimated sales, SOUN stock appears expensive. However, it might be worth paying the premium, given the company’s explosive growth prospects in the voice AI market.

What Does Wall Street Say About Soundhound AI?

Overall, SOUN stock is a “moderate buy” on Wall Street. Of the six analysts covering SOUN stock, four rate it a "strong buy," while two rate it a "hold." The stock has an average target price of $7.17, implying a 15.6% upside potential from current levels.

Furthermore, DA Davidson analyst Gil Luria has assigned a high price estimate of $9.50, which implies the stock can rally 53.2% over the next 12 months. The analyst believes SoundHound's outstanding technology gives it an upper hand in the AI customer service industry.

The Bottom Line on SOUN

SoundHound AI operates amid stiff competition, with major tech titans such as Alphabet (GOOGL), Amazon (AMZN), and Apple (AAPL) dominating the voice recognition market. Nonetheless, as DA Davidson analyst Luria stated, SoundHound AI has a competitive advantage because of its early mover advantage in the AI customer service business. The company's innovative voice recognition technology, strategic partnerships, and commitment to growth make it an appealing long-term investment opportunity for those interested in AI and emerging technologies.

The company is still unprofitable, but this may change soon if the company continues to grow revenue at this pace. However, as a penny stock, SOUN carries risk. As a result, investors should conduct thorough due diligence before considering this penny stock.

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.