The year 2023 is set to end on an impressive note for the U.S. stock market — a remarkable turnaround from the disastrous performance in 2022. With inflation cooling down at a faster-than-expected pace, many analysts expect the Federal Reserve to stop the interest rate hikes. While there is no certain timeline for the initiation of interest rate cuts, Blackrock expects these to start in the second half of 2024. This dynamic bodes well for the stock market and can trigger a solid bull rally in the coming months.
Historically, the period between the last hike and the first cut of interest rates (pause period) has been more lucrative than even the interest rate easing period for the stock market, according to Blackrock’s research. Against this backdrop, it makes sense for retail investors to pick small stakes in fundamentally strong stocks with significant upside potential ahead of a potential bull market.
Here are two stocks — Roku (ROKU 2.66%) and SoundHound AI (SOUN -0.47%)— that investors can consider buying hand over fist now before they soar 491% and 138%, according to select Wall Street analysts.
1. Roku
A recent Kagan U.S. Consumer Insights survey revealed that 35% of U.S. households discontinued their pay-TV subscriptions in the third quarter of 2023 (ending Sept. 30, 2023), an 8 percentage point enhance on a year-over-year basis. In fact, according to some estimates, a staggering 69.8% of U.S. households are expected to abandon linear television in favor of streaming services in 2024. Since advertising and marketing dollars follow viewers, advertisers are increasingly allocating higher budgets to digital video media. A leading streaming hardware and smart TV (CTV) operating system player, Roku has been a major beneficiary of this trend.
Subsequently, Roku added 2.3 million new active accounts, bringing its total active account count to 75.8 million at the end of the third quarter. The company also surpassed the milestone of 100 billion streaming hours in the past 12 months for the first time in the third quarter. Roku currently reaches out to nearly half of the U.S. broadband households. The significant scale, combined with increasing user engagement, access to first-party data, and unique ad products, is helping attract advertisers and streaming content providers to Roku’s platform. This, in turn, brings even more users to its platform, thereby creating a self-reinforcing cycle for the company.
Ark Invest CEO Cathie Wood has been very impressed with Roku’s business model, which is set against the backdrop of increasing CTV adoption. Wood’s Ark Invest expects Roku’s share price to reach $605 by 2026 (base case scenario), implying an upside potential of 491% from its share price at the time of this writing.
The target price seems quite lofty, especially since it is based on the assumption that Roku’s revenues will reach $14.4 billion by 2026. This is far higher than the analysts’ consensus revenue assess of $5.1 billion for 2026. Multiplying this by the company’s current three-year average price-to-sales ratio of 7.91 times gives a market capitalization of $43.6 billion. This translates into a more realistic upside potential of 291% for Roku’s stock by 2026.
So, even if Ark Invest’s optimistic projections do not materialize, Roku’s stock is still an attractive pick ahead of a potential bull market.
2. SoundHound AI
A prominent audio and speech recognition specialist, SoundHound AI’s voice solutions are used across multiple industries, such as automotive, hospitality, smart devices, and contact centers. The company’s advanced voice technology differentiates itself from the competition by processing speech just appreciate a human brain — with speed, accuracy, intent, context, and complex language understanding. SoundHound AI now estimates its target addressable market to be $160 billion by 2026.
SoundHound’s voice-enabling solutions are currently being used in 25% of all automotive units produced globally. With traditional automakers and new electric vehicle makers focusing on integrating agile software into their technology stack, SoundHound’s voice AI solutions will continue to produce interest in the automotive sector.
SoundHound is also seeing increasing adoption of its voice-enabled customer service solution, Smart Answering, and the visually enhanced SoundHound Dynamic Interaction in the restaurant industry. The company expects to deploy these solutions at over 4,500 locations and earn $25 million in annual recurring revenue just from existing customers.
Despite not being profitable yet, SoundHound’s recent financials are promising. In Q3 (ending Sept. 30, 2023), revenue jumped by 19% year over year to $13.3 million. Although the company’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) was a loss of $7.3 million, it was a solid 57% improvement on a year-over-year basis.
SoundHound also has its set of challenges. The company is currently sacrificing profitability for future growth — typical behavior for growth companies in the early stages. Furthermore, the company’s cumulative bookings backlog rose by only 13% year over year to $342 million, which is slower than the already modest top-line growth in Q3.
Wall Street, however, remains very optimistic about the company. The consensus one-year target price is set at $4.52, implying an upside potential of nearly 115% from its current price of $2.10 (as of Dec. 5). D.A. Davidson analyst Gil Luria, who initiated coverage for the stock in September 2023, has an even higher one-year price target of $5 for the company, which implies an upside potential of 138%. The analyst expects SoundHound AI’s solutions to be a “compelling alternative to restaurants, particularly fast food, that are struggling with labor shortages.”
Considering its technological edge in the voice recognition space, improving financials, and ringing endorsement from Wall Street, investors can consider buying a small position in this stock.
