SoundHound AI, Inc.'s (NASDAQ:SOUN) price-to-sales (or "P/S") ratio of 30.5x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.3x and even P/S below 1.6x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does SoundHound AI's P/S Mean For Shareholders?

SoundHound AI certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is SoundHound AI's Revenue Growth Trending?

In order to justify its P/S ratio, SoundHound AI would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 53% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 174% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 110% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 22%, which is noticeably less attractive.

With this in mind, it's not hard to understand why SoundHound AI's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SoundHound AI maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 4 warning signs for SoundHound AI that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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