SoundHound AI (NASDAQ: SOUN) went public by merging with a special purpose acquisition company (SPAC) last April. The audio and speech recognition company's stock opened at $8.72 and hit an all-time high of $14.98 less than a month later.

SoundHound's stock surged as growth of the generative AI market sparked a buying frenzy in AI-related stocks. It was also carving out a niche with speech recognition services that didn't lock its users and clients into walled gardens in the same way as Alphabet's Google, Microsoft, and other tech giants.

But in November, SoundHound's stock was trading at about $2. It lost its luster as revenue growth cooled and the company racked up steep losses. SoundHound fell short of its pre-merger expectations, and rising interest rates exacerbated that pain by compressing its valuations.

So does this out-of-favor AI stock have a shot at bouncing back over the next 12 months?

What happened over the past year?

SoundHound's revenue rose 47% to $31 million in 2022, which surpassed its pre-merger forecast for 41% growth. But over the past year its revenue growth decelerated, gross margins declined, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins remained negative.

Data source: SoundHound AI. YOY = Year-over-year.

SoundHound mainly blamed that slowdown on the macro headwinds, which drove many companies to rein in their software spending. But for the fourth quarter it expects revenue growth to accelerate again -- rising 68% to 111% year over year.

That outlook implies its revenue will rise between 44% and 57% for the full year. That's well below its pre-merger forecast for 245% revenue growth in 2023, but matches its prior forecast for "approximately 50%" growth.

SoundHound also claims its adjusted EBITDA will turn positive in the fourth quarter as it streamlines spending. The company laid off 10% of its workforce after its public debut, then laid off roughly half of its remaining employees in early 2023.

What will happen to SoundHound in 2024?

For the full year, analysts expect SoundHound's revenue to rise 50% to $47 million as it narrows its adjusted EBITDA loss from $73 million to $33 million. For 2024, they expect revenue to grow 51% to $70 million with an adjusted EBITDA loss of $5 million. Based on those estimates and its enterprise value of $533 million, SoundHound looks reasonably valued at seven times next year's sales.

During the latest conference call, CFO Nitesh Sharan said the company was "set up well for the future" and "had a lot of runway ahead." Sharan said its existing contracts provided it with "good visibility for future growth" -- even as it dealt with some "very lumpy" deals from larger customers in the "dynamic" macro environment -- and he was still "excited about the growth trajectory building into 2024 and beyond."

CEO Keyvan Mohajer also predicted SoundHound's new large language models would enable its platform to "reach new heights" as the generative AI market expands. It already provides custom services for major customers like Hyundai, Stellantis, Vizio, and White Castle, and it could continue to grow as more companies integrate AI-powered voice recognition features into their products and services.

Don't overlook its obvious weaknesses

SoundHound's future seems bright, but investors shouldn't overlook its three biggest weaknesses. First, it has a customer concentration problem, with over two-thirds of its revenue coming from its top three customers last year.

Second, it's still unprofitable on a generally accepted accounting principles (GAAP) basis, and ended its latest quarter with a high debt-to-equity ratio of 4.6. It was carrying $83 million in long-term debt on its balance sheet, with just $96 million in cash and equivalents. That red ink and high leverage could drive away the bulls as long as interest rates stay elevated.

Lastly, as of November, SoundHound's insiders sold more than ten times as many shares as they bought over the past 12 months. That chilly insider sentiment suggests its stock won't bounce back anytime soon.

Where will SoundHound's stock be in a year?

SoundHound's downside might seem limited, but the concerns about its poor balance sheet will likely cap its gains in this tough market. Its stock could gradually head higher over the next 12 months if it continues to grow its quarterly revenue by about 50% year over year and achieves its goal of maintaining positive adjusted EBITDA margins -- but it could still underperform the market and remain well below its all-time highs until it resolves its biggest long-term challenges.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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