Is SoundHound Stock a Buy, Sell or Hold at a P/E Multiple of 26.1X?

Core Insights - SoundHound AI (SOUN) is currently trading at a forward 12-month price-to-sales (P/S) multiple of 26.1X, significantly higher than its three-year median of 13.9X and the industry average [1][9] - The company's stock has shown strong momentum, rallying 34.6% over the past three months, while the industry has declined by 8.7% [4] - Despite impressive revenue growth of 217% year-over-year in Q2, the company continues to face ongoing losses, raising questions about the sustainability of its current valuation [2][12] Financial Performance - In Q2 2025, SoundHound reported revenues of $42.7 million, exceeding analyst expectations, but GAAP loss widened to $74.7 million due to a $31 million non-cash acquisition expense [12][9] - The Zacks Consensus Estimate for 2025 earnings has improved, with projected loss per share narrowing to 13 cents from 16 cents [13] - The company raised its 2025 sales outlook to $160-$178 million, reflecting confidence in its growth pipeline [29] Market Position and Growth Drivers - SoundHound's enterprise segment is expanding across various industries, with significant customer renewals and upsells, indicating strong customer retention [19] - The restaurant vertical is a key growth area, with over 14,000 active locations and partnerships with major brands like IHOP and Chipotle [21] - The automotive sector remains a long-term revenue driver, with new deals expected to generate significant unit shipments globally [24] Challenges and Risks - Despite revenue growth, margin pressures persist, with GAAP gross margin declining to 39% in Q2 due to lower initial margins from acquired contracts [26] - Operating expenses have risen significantly, with R&D up 64%, sales and marketing up 180%, and G&A up 91%, contributing to a negative adjusted EBITDA [27] - The competitive landscape in the quick-service restaurant sector includes strong rivals like Amazon and Alphabet, which could limit SoundHound's market share [23] Balance Sheet and Outlook - SoundHound ended Q2 with $230 million in cash and no debt, providing flexibility for growth investments [29] - The company aims for adjusted EBITDA profitability by late 2025, but execution challenges remain [30] - The current premium valuation at 26.1X P/S suggests caution for new investors, while existing investors may benefit from long-term AI adoption trends [31][32]