Could Evolv Technologies be the next SoundHound AI?

SoundHound AI (Seong 0.40%) The stock has risen about 130% so far this year as the developer of voice-recognition tools has grown rapidly and impressed bulls by attracting new funding from investors. NVIDIA (NASDAQ: NVDA).

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

Houndify drove much of the company’s growth, with revenue increasing 47% in both 2022 and 2023. The company expects revenue to grow at least 74% in 2024 and more than 88% from that baseline in 2025 as it expands its ecosystem with further acquisitions.

Image source: Getty Images.

While these growth rates are impressive, SoundHound’s stock is not cheap at 20 times this year’s sales. It may still be a good speculative stock in the AI ​​market, but it may not have as much upside as smaller, niche AI ​​stocks that trade at lower valuations. So let’s take a look at one of the undervalued small cap stocks. Evolve Technologies (EVLV -0.83%) — and see if it can replicate SoundHound’s gains in the coming years.

What does Evolv Technologies do?

Evolve’s AI-powered security screening system is designed to replace traditional metal detectors. It can scan people about 10 times faster than metal detectors, without the need to empty pockets, open bags or slow down. Two people can go through the system at the same time, processing up to 4,000 people per hour. The system “uses extremely low frequency waves, electromagnetic fields and advanced sensors to detect concealed weapons.”

Evolve serves over 750 major customers, including schools, hospitals, and major sports teams, and tests over 1 million people daily. The company has deployed over 4,000 high-speed units around the world, and says it detects at least 1,000 weapons every day. It also provides a cloud-based platform for data storage and analysis. Bill Gates and Jeb Bush’s Finback Investment Partners is known to be Evolve’s largest investor before it went public.

How fast is Evolv Technologies growing?

Evolve went public in July 2021 through a reverse merger with a blank check company. However, in a pre-merger presentation, the company claimed that revenue could grow from $20.2 million in 2021 to $132.3 million in 2023. It also projected that adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) would turn profitable with a small 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.

While Evolv clearly overpromised and fell short of expectations, it continued to add new customers amid a tough macro environment. The company attributes this expansion to an increased need for enhanced security measures in the US.

In 2024, Evolve expects its adjusted EBITDA to improve by more than 40% and revenue to grow 24% to about $100 million. Analysts expect its adjusted EBITDA loss to narrow to $32.9 million and revenue to grow 27% to $102.1 million.

The company expects its revenue to grow at a compound annual growth rate (CAGR) of 28% from 2023 to 2026, with adjusted EBITDA turning positive in the final year of the plan. Based on these expectations, Evolve’s stock is reasonably valued at 4.5 times this year’s sales. The company also looks unlikely to go bankrupt anytime soon, as it ended Q2 2024 with zero debt and $56.7 million in cash, cash equivalents, securities, and restricted cash on its balance sheet.

What are Evolv Technologies’ weaknesses?

Evolv’s security system is innovative, but it’s also expensive. A traditional metal detector costs about $10,000. Evolv’s system is sold as a service, and customers must sign a four-year contract for $2,500 per month, which means it will cost $120,000 to cover one door over the life of the contract.

The difference between Evolve’s pre-merger forecasts and actual results suggests that its overall addressable market has shrunk over the past three years due to macroeconomic headwinds. The company also faces stiff competition from similar advanced weapons detection and security system providers, such as SafePoint, ExtractOne and Athena Security. This pressure could limit Evolve’s pricing power and squeeze its gross margins, making it less profitable.

Will Evolv be able to garner as much attention as SoundHound AI?

Bill Gates’ investment initially drew attention to Evolve’s IPO, but the company’s stock price has fallen by about 70% over the past three years. It’s clear that Evolve has significantly underperformed its own expectations, disappointing investors, and the company’s future remains uncertain.

Evolv’s stock price may be bottoming here, but it’s unlikely to attract as much attention as SoundHound, which is growing faster with Nvidia’s backing and has more upside potential as it expands into the restaurant, automotive and consumer device markets.

Evolv is a niche AI ​​company that is unlikely to bounce back like SoundHound unless it sees faster growth, a larger overall addressable market, and reduced losses. It’s an interesting speculative stock, but it’s definitely not the right time to buy yet.