One Wall Street analyst believes shares of new artificial intelligence companies could rise 60% next year

Looking at Wall Street analyst price targets can be a useful exercise because it may reveal some stocks with huge growth potential that you haven’t considered. Once you spot a stock like this (at least according to analysts), your best bet is to do your own research and see if you can confirm their findings. One stock with huge growth potential is SoundHound AI (SOUND -0.97%)small artificial intelligence (AI) company.

DA Davidson’s Gil Luria has a $9.50 price target on SoundHound stock. This data was last updated on September 30th, so the analyst’s target is based on the same information that all investors now have access to. This price target indicates upside potential of around 60%, which would be a fantastic year-over-year gain for the stock.

Is this a legit price tag? Or should investors stay away? Let’s find out.

SoundHound’s product has already been integrated into several industries.

SoundHound AI does what its name suggests: it uses artificial intelligence to identify and process sounds. While recognizing sound and converting it into something that can be input into a computer is a very broad and useful technology, SoundHound is seeing commercial success in two specific areas: restaurants and the automotive industry.

For restaurants, the company helps streamline operations by using its artificial intelligence model for on-premise and mobile ordering. The productivity of these models often exceeds that of the people they complement, allowing restaurants to become more efficient.

On the automotive side, the company is integrating its technology with various generative AI models to make driving assistants more useful. His most famous client is Stellantisand the SoundHound model has been integrated into various makes and models under the manufacturer’s umbrella in Europe and Japan.

This is a relatively niche application of technology, but achieving success in a few areas before expanding into others is key to growing a company. The business case is there, but what about its financials?

2025 promises to be a big year for SoundHound

SoundHound is still a relatively small company, so its revenue numbers may not be immediately apparent. In the second quarter, revenue was $13.5 million, up 54% year over year.

However, it has unpaid proceeds totaling $723 million. This shows there is huge demand for its technology, but it will take some time for integration and testing before SoundHound can recognize it as revenue from its partnership.

Management hopes it can start converting some of that backlog into revenue in 2025, so it expects revenue to top $150 million next year. That’s a quick upside, but if it happens, the $9.50 price target won’t seem all that far-fetched.

SoundHound stock looks expensive right now because it’s trading at 30. sales times.

SOUN PS ratio; data on YCharts; PS = selling price.

But this uses finite data. If we factor in management’s 2025 guidance of $150 million, the price-to-sales (P/S) ratio drops to 11 times forward sales. This would be a fairly cheap valuation considering the company would have effectively doubled its revenue at that time.

So SoundHound’s valuation could end up being more than 11 times sales, sending the stock higher. As a result, I don’t think the $9.50 price target is out of bounds.

If management can deliver on what it told investors on its Q2 conference call, SoundHound AI will easily be a smashing investment next year. So I think investors can buy the stock. if they believe in what management is saying and in the company’s potential market opportunity.