SoundHound AI’s Stock Surge: Opportunity or Overvaluation?

At the close of 2024, smaller AI stocks have surged dramatically, particularly those backed by Nvidia (NASDAQ: NVDA). A $3.7 million investment in SoundHound AI (NASDAQ: SOUN) a year ago has propelled it into the spotlight as a potential leader in the AI space. Recently, the company has expanded rapidly, significantly increasing its customer base and making several strategic acquisitions.

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Could SoundHound’s rising stock price indicate it’s on track to become a major AI player, or are we witnessing the formation of a market bubble?

SoundHound’s Recent Accomplishments

This year, SoundHound has positioned itself as a leading voice-enabled AI provider outside of major tech companies. Notably, it has secured contracts with seven of the top 20 quick-service restaurant (QSR) brands, including Chipotle, to enhance phone and drive-through purchasing. In the automotive sector, SoundHound has integrated its voice AI into vehicles from several frontline auto manufacturers, including brands under Stellantis, and four major electric vehicle companies.

In addition to these core markets, SoundHound’s acquisition of Amelia, another enterprise-focused voice AI firm, in the summer adds value by enhancing its service and employee-facing AI platforms.

SoundHound’s Historical Strength in Voice AI

Serving the AI landscape since 2005, SoundHound has evolved alongside the recent generative AI boom, releasing its Houndify voice AI platform in 2015. The company has decades of experience developing technology that supports billions of conversations across various languages.

While it uses some third-party models, SoundHound stands out with its proprietary model, Polaris, which already powers about one-third of its restaurant orders. Management expects that Polaris will be integrated into all interactions across its platform. Proprietary data significantly enhances competitive positioning in the AI space.

Increased Financial Guidance

During its mid-November earnings call, SoundHound reported impressive 89% revenue growth. The company’s management raised its revenue forecast for 2024 to between $82 million and $85 million, and for 2025, it now expects $155 million to $175 million. These figures surpass previous projections, indicating strong operational momentum despite more than doubling operating losses—from $14 million to $33 million last quarter. For a company showing rapid revenue growth, this level of investment may be manageable.

Image source: Getty Images.

Potential Risks in Investment

Despite SoundHound’s rapid growth, investors should exercise caution before purchasing its stock. The primary concern is the company’s valuation. Recently, SoundHound’s stock price soared 400% within just two months, pushing its market capitalization to a staggering $9 billion as of now. If the company were to exceed its 2025 revenue target by 25%, the price-to-sales ratio would still be an exorbitant 45 times next year’s revenue, suggesting unsustainable expectations.

The surge in stock price appears influenced by broader trends in next-gen tech, including AI and cryptocurrencies, rather than fundamental business performance. The meme stock phenomenon is also in play; SoundHound’s short interest was recorded at 22.1% at the end of November, which could be driving speculative trading as investors buy in to trigger short-covering—a trend reminiscent of the software bubble in 2021 before it collapsed.

While analysts have similarly raised their price targets as the stock climbs, caution is warranted, as they might be reacting to changing circumstances rather than predicting them. High valuations linked to speculative trading can lead to substantial risks if external factors like competition or economic changes arise.

SoundHound’s Prospects

SoundHound has demonstrated impressive expansion and innovation in its services. However, the current stock valuation raises concerns. Should the price decline significantly while the company continues to strengthen, it could become a more attractive investment in the future. Wisely, investors might wait for a more favorable entry point.

Should You Invest $1,000 in SoundHound AI Now?

Before deciding to invest in SoundHound AI, careful consideration is advised:

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Billy Duberstein and/or his clients have no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Stellantis and offers options to short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.