Could Evolv Technologies Be the Next SoundHound AI?

SoundHound AI (SOUND 0.40%) the stock is up about 130% this year. The developer of audio and speech recognition tools impressed the bulls as it grew rapidly and attracted a new investment from Nvidia (NASDAQ: NVDA).

SoundHound has carved out a niche in the AI ​​market with two main platforms: its eponymous app, which identifies songs from short audio clips, and Houndify, a platform that allows companies to develop their own speech recognition tools.

Houndify drove most of the company’s growth, as revenue grew 47% in both 2022 and 2023. Its revenue is expected to grow at least 74% in 2024 and grow by more than 88% from this baseline in 2025 as it expands its ecosystem with more acquisitions. .

Image source: Getty Images.

Those growth rates are incredible, but SoundHound stock isn’t cheap at 20 times this year’s sales. It may still be a good speculative play in the AI ​​market, but it may not have as much growth potential as smaller niche AI ​​plays that trade at lower valuations. So let’s examine one of those underappreciated small-cap plays — Evolv Technologies (Hebrews -0.83%) — and see if they could replicate SoundHound’s gains over the next few years.

What does Evolv Technologies do?

Evolv’s AI-powered security screening systems are designed to replace traditional metal detectors. They can scan people about 10 times faster than a metal detector and don’t require them to empty their pockets, open their bags or slow down. Also, two people can go through the system at once and it can process up to 4,000 people per hour. The system uses “ultra-low frequency, electromagnetic fields and advanced sensors to detect hidden weapons.”

Evolv serves more than 750 major customers — including schools, hospitals and major sports teams — and scans over one million people every day. It has more than 4,000 express units worldwide and says it detects at least 1,000 guns every day. It also provides a cloud-based platform for data storage and analysis. Bill Gates and Jeb Bush’s Finback Investment Partners were notably Evolv’s top investors before its public debut.

How fast is Evolv Technologies growing?

Evolv went public through a reverse merger with a blank check company in July 2021. However, in a pre-merger presentation, the company claimed it could grow its revenue from $20.2 million in 2021 to $132 .3 million in 2023. earnings before interest, taxes, depreciation and amortization (EBITDA) would turn positive, with a meager profit of $5.2 million in 2023. But here’s what actually happened over the past three years.

Data source: Evolv Technologies. YOY = Year Over Year.

Evolv clearly over-promised and under-delivered, but continued to win new customers in a challenging macro environment. She attributes this expansion to the growing need for tighter security measures in America.

For 2024, Evolv expects its revenue to grow 24% to about $100 million as adjusted EBITDA improves more than 40%. Analysts expect its revenue to rise 27% to $102.1 million as it narrows its adjusted EBITDA loss to $32.9 million.

From 2023 to 2026, its revenue is expected to grow at a compound annual growth rate (CAGR) of 28% as adjusted EBITDA turns positive in the final year. Based on those expectations, Evolv stock looks reasonably valued at 4.5 times this year’s sales. It also ended the second quarter of 2024 with no debt and $56.7 million in cash, cash equivalents, marketable securities and restricted cash on its balance sheet — so it’s definitely not going to go bankrupt anytime soon.

What are the weaknesses of Evolv Technologies?

Evolv security systems are innovative, but they are also expensive. A traditional metal detector costs about $10,000. Evolv’s systems are sold as a service that locks its customers into four-year contracts at a rate of $2,500 per month. That means it costs $120,000 to cover a single door over the entire contract.

The difference between Evolv’s pre-merger estimates and its actual numbers suggests that headwinds have reduced its total addressable market over the past three years. It also faces stiff competition from similar providers of advanced gun detection and security systems such as SafePointe, Xtract One and Athena Security. This pressure could limit Evolv’s pricing power, squeeze its gross margins and prevent it from ever turning a profit.

Could Evolv get as much attention as SoundHound AI?

Bill Gates’ investment initially threw Evolv’s public debut into the spotlight, but its stock has fallen about 70% over the past three years. It has clearly disappointed its investors, generally missing its own expectations, and its future still looks murky.

Evolv stock may bottom out here, but it won’t get as much attention as SoundHound — which is growing faster, backed by Nvidia, and has more upside potential as it expands into restaurant markets , automotive and consumer devices.

Evolv is a niche AI ​​play, but it probably won’t make a comeback like SoundHound unless it grows faster, expands its total addressable market, and cuts its losses. It’s an interesting speculative stock, but certainly not a screaming buy just yet.