We recently published a list of 10 Small Cap Stocks with High Potential. In this article, we are going to take a look at where SoundHound AI, Inc. (NASDAQ:SOUN) stands against other small cap stocks with high potential.
As we transition from a tumultuous summer in the financial markets, characterized by rising expectations for interest rate cuts and the consequent impacts on stock and bond performances, investors are now navigating a landscape of heightened volatility and uncertainty. The small-cap segment of the stock market has garnered increasing attention in 2024, as expectations of a shift in monetary policy continue to evolve. Since early July, smaller companies have notably outperformed their larger peers, signaling a robust appetite for these stocks despite ongoing economic uncertainty. This trend has spurred interest among investors looking for high-growth potential opportunities within a more volatile market environment.
Nancy Prial, Co-CEO and Senior Portfolio Manager at Essex Investment Management, shared her optimistic outlook for small cap stocks in a recent interview with CNBC on September 30. Prial expects small cap stocks to gain momentum as a result of the rate cuts that have already occurred and additional expected reductions. According to Prial, small-cap stocks remain under-owned in the market and represent only a small percentage of the overall equity market. She highlighted that the conditions are ripe for a strong performance by smaller companies, provided there is a confidence boost from navigating a soft landing rather than a recession.
Prial emphasized that stock selection will be critical in this environment, as not all small-cap stocks are likely to benefit from rate cuts equally. She anticipates that some small-cap companies could see earnings growth in the range of 15% to 20% next year, driven by strong fundamentals and growth-oriented business models. According to Prial, while the broader indices may not deliver the same level of returns, select companies within the segment have the potential to outperform significantly.
As the outlook for the small-cap market brightens, sectors like technology are also poised to benefit from advancements in artificial intelligence and automation. Prial mentioned that these areas could drive innovation and growth within the small-cap segment, offering compelling opportunities for investors. With clear signals from central banks and ongoing technological developments, smaller companies are positioned to capitalize on emerging trends, making them an attractive option for those seeking to diversify and tap into high-potential stocks in the final quarter of the year.
Tom Lee, Head of Research at Fundstrat Global Advisors, echoes a similarly bullish sentiment. Lee believes that the recent volatility in small-cap stocks is part of a multi-year bottoming process, driven by economic data and investor expectations. Despite the unpredictability, Lee expects a significant rally in small-cap stocks once there is clarity on the rate cut cycle. He notes that small caps, which typically trade at 10 times forward price-to-earnings ratios, offer better earnings growth prospects than many mega-cap growth stocks. For Lee, the easing of monetary policy and improving fundamentals make small caps a compelling buy, even in the face of near-term volatility.
One of the primary drivers behind the renewed interest in small-cap stocks is the anticipated easing of monetary policy by central banks. As inflation cools down and economic growth slows, analysts widely expect a series of rate cuts in the coming months. Lower borrowing costs would benefit small-cap companies, which often rely on traditional bank loans instead of accessing corporate bond markets like their larger counterparts. As a result, smaller companies are likely to benefit more directly from the expected rate cuts, making them appealing investment opportunities as the economy starts to recover.
While optimism is building, investing in small-cap stocks does come with risks. A significant portion of these companies have reported negative earnings over the past year, emphasizing the need for a selective approach. Analysts recommend focusing on profitable sectors such as financials, utilities, and consumer discretionary, which have shown resilience despite economic headwinds. Financials, for instance, have delivered robust earnings, while utilities have performed well, although they represent a smaller portion of the market capitalization.
By diversifying portfolios with strategically selected small-cap investments and leveraging the stabilizing power of bonds, investors can position themselves to not only weather market fluctuations but also thrive in the evolving economic environment. The remainder of 2024 could very well be a pivotal period for small-cap stocks, providing opportunities for those willing to embrace the associated risks and rewards.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $2 billion and having Buy or Buy-equivalent ratings and traget price 40% above current price from analysts as of October 5. These stocks have also gained more than 100% in value year to date in 2024. Next, we examined Insider Monkey’s data on 912 hedge funds as of Q2 2024. We narrowed down our list to 10 stocks most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q2 of 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A software engineer focused on a computer screen, writing code to create a conversational assistant.
SoundHound AI, Inc. (NASDAQ:SOUN)
Number of Hedge Fund Holders: 15
Market Cap as of October 5: 1.68 Billion
Average Analysts’ Target Price as of October 5: $7.79
Year to date Share Price Gain: 121.23%
SoundHound AI, Inc. (NASDAQ:SOUN) is a prominent small-cap company specializing in independent voice artificial intelligence (AI) solutions. It serves various industries, including automotive, TV, and Internet of Things (IoT), by providing businesses with advanced conversational interfaces. This diversified portfolio positions the company as a high-potential stock for inclusion in our lis tof ten small cap stocks with high potential, given its growth prospects and solid fundamentals.
The company’s unique Houndify platform offers a suite of tools enabling brands to develop conversational voice assistants. This platform supports custom commands, text and voice queries, and an extensive library of content domains. Additionally, SoundHound’s product lineup includes Smart Answering for customer service and SoundHound AI, Inc. (NASDAQ:SOUN) Chat AI, which integrates real-time data such as weather, stocks, and sports, making it a comprehensive AI assistant.
SoundHound AI, Inc. (NASDAQ:SOUN) Q2 2024 earnings call highlighted strong performance, with revenue up by 54% year-over-year. The company’s bookings backlog doubled to $723 million, demonstrating the increasing demand for its solutions. The annual run rate of queries surpassed 5 billion, showcasing its growing market penetration and consumer engagement. Moreover, the company’s recent acquisition of Amelia, a conversational AI leader, further strengthens its presence in the generative AI space and expands its market opportunities.
SoundHound AI, Inc. (NASDAQ:SOUN) strategic partnerships with major automotive manufacturers like Stellantis are particularly noteworthy. The integration of SoundHound Chat AI into vehicles across multiple brands such as Peugeot, Opel, and Alfa Romeo has led to increased adoption rates and boosted revenue potential through upsell features. This collaboration also marks SoundHound as the first company to roll out ChatGPT-style capabilities in vehicles across Latin America.
The company is also gaining traction in the quick-service restaurant (QSR) segment, winning contracts with five of the top 15 QSRs based on location count. SoundHound’s voice solutions enhance operational efficiency and customer experience, making it an attractive proposition for large enterprises. Overall, SoundHound AI, Inc. (NASDAQ:SOUN) consistent revenue growth, expanding market presence, and innovative AI solutions position it as a small-cap stock with significant upside potential for investors seeking exposure to the rapidly growing AI industry.
Overall, SOUN ranks 6th on our list of small cap stocks with high potential. While we acknowledge the potential of SOUN to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SOUN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.