Hyperscalers are investing heavily to stay at the forefront of the AI revolution. However, this has left many wondering what AI tools are helping businesses and the economy now, or will in the near future? Increased advertising efficiency is a notable success. Companies like Meta (NASDAQ: META) and AppLovin (NASDAQ: APP) exemplify this.

Another area that has been exciting in the market is AI speech recognition, driven largely by one company: SoundHound AI (NASDAQ: SOUN). The company’s shares went parabolic back in February after the market found out that NVIDIA (NASDAQ: NVDA) made a $3.7 million investment in the company. SoundHound reports its next quarterly earnings on Nov. 12. So, is SoundHound a Buy ahead of this release? Additionally, what kind of opportunity does this stock have long term?

A Framework for Evaluating SoundHound Pre-Earnings

When thinking about whether buying SoundHound AI stock ahead of earnings could make sense, I’m looking at four things. First, the company’s history of beating its revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) expectations.

Next is whether it kept neutral, raised, or lowered its revenue and adjusted EBITDA guidance compared to the previous quarter’s outlook. Third is the stock price reaction to these two results over the following days. Lastly, it’s important to consider recent developments that could cause the company to exceed expectations.

SoundHound’s Post-Earnings Performance and Potential Catalysts: A Deep Dive

In 2023, the company’s revenue was about $600,000 below its midpoint guidance. It also missed Q4 2023's goal of positive adjusted EBITDA. Over the next three days, shares fell by 33%. It didn’t provide any guidance change comparable to what was previously released. In Q1 2024, the company beat revenue expectations by nearly 15%, but also missed EBITDA expectations significantly. It raised its midpoint revenue guidance for the full 2024 year by slightly less than 2%. Shares rose nearly 12% over the next three days.

In Q2 2024, the company beat sales expectations by around 3%, fell short on EBITDA again, but also significantly raised guidance. It raised its 2024 revenue guidance above the prior high end. It also boosted 2025 guidance by 50% to $150 million. However, much of this is due to its acquisition of Amelia, which was generating about $45 million in annual revenue before the purchase. Thus, the rise in guidance was mostly inorganic. It was not mainly due to improvements in SoundHound's business before the acquisition. Shares fell 4% in the three days after the release. Overall, the stock's three-day price reaction over the last four quarters post-earnings is around -7%.

However, a deal with MUSC Health, a top South Carolina hospital, could boost SoundHound's earnings above expectations next quarter. The organization brought in over $8 billion in gross patient revenue in fiscal 2023. Given its massive size, SoundHound could generate significant revenue from the deal announced on Aug. 28 in the quarter ending Sept. 30. This was not previously anticipated.

History suggests more downside risk than upside in trading SoundHound before earnings. However, there is reason to believe that things could be different this time. The company's $723 million booking backlog from last quarter is a potential tailwind. It represents future revenue. Analysts expect the company to generate only $23 million in revenue next quarter. If the company can turn even a fraction of its backlog into revenue sooner, it could beat expectations. Based on all this, I hold a neutral position on buying SoundHound ahead of earnings.

SoundHound Has a Massive Opportunity Long Term

The much more exciting prospects for SoundHound come when thinking long term. The company’s total addressable market (TAM) is massive. Everything from restaurant ordering, over-the-phone customer service, automobile communication, and use in the vast network of Internet of Things devices comes to mind. Wall Street is bullish on this stock. Five analyst price targets were released after the company’s August 8 earnings report, which averaged to $7.70 per share. This implies an upside in the stock of 43%. The most recent targets released in late September are the most bullish.

The stock is expensive based on its projected future revenue. Its forward price-to-sales ratio is above 95% of U.S. tech stocks. However, its adoption by many large enterprises and its huge backlog shows the strong demand for AI voice recognition solutions. Being recognized for its use in healthcare and retail banking, Amelia expands the industry use cases for SoundHound’s technology. Its high valuation isn't all that surprising. Long-term, I have a bullish view on SoundHound AI.