AI stocks across all sectors have been seeing a meteoric rise over the past two years, but even with that rise, it’s pretty rare to see triple-digit rallies in just one month. SoundHound AI (NASDAQ: SOUN) is up 155% in the past month as of writing. In fact, it is up 713% year-to-date. So, what’s driving this surge? Is it just hype and speculation, or are there real fundamentals behind SoundHound’s recent success? Let’s take a deeper look.
24/7 Wall St. Key Points:
- SoundHound’s stock is mostly up due to speculation and a possible short squeeze.
- The company is far from being profitable but top-line growth is driving a lot of excitement. Here are 50 brands that have similarly blown up.
- SoundHound’s addressable market is huge, so there’s a lot of room for growth. However, sustaining that growth with current profitability metrics might be difficult.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Why Is SOUN Stock Up?
SoundHound has been posting some of the most solid top-line figures in the AI startup space. SoundHound posted Q3 results on November 12, 2024, with revenue up 89% year-over-year to $25.1 million. This exceeded the consensus estimate of $23 million. It also raised its full-year 2024 revenue outlook to $82-85 million. The projected 2025 revenue is between $155-175 million.
As a response, Barclays and Ladenburg Thalmann both maintained a Neutral rating with a $7 price target, whereas DA Davidson reiterated a Buy rating with a $9.5 target and Wedbush recently set a $22 target. SOUN stock trades at almost $17 as of writing.
Regardless, the Q3 results initially caused a drop in the stock price before the stock began to gain momentum again the next week; it can be attributed to reports of a 20% productivity increase at Apivia Courtage contact centers using SoundHound AI and the announcement of “Hey KIa” voice AI in India.
The rally intensified the week after that along with the broader AI market. SoundHound also announced its participation in investor conferences in December. By the end of November, the stock had skyrocketed 85.1% for the month.
Things only got better for SoundHound in December after the announcement of Torchy’s Tacos deploying SoundHound’s Voice AI Phone Ordering across all its locations and growing market projections for the $140 billion addressable AI market.
Could SOUN Stock Start Dropping Again?
SoundHound’s growth metrics and market position are quite impressive. The company has a lot going for it, and analysts seem to agree. That said, you should remember that the recent rally has been above and beyond anyone’s expectations. There’s a good chance that the 155% gain was the result of a short squeeze.
Short interest is still at nearly 25% here. SoundHound is unprofitable, with mounting losses that could persist for years. The financials are not very flashy when you look beyond the top-line growth figures and start to think about sustainability. Operating losses increased 132% year-over-year in Q3.
With all that in mind, I believe there’s a good chance that SOUN stock could indeed start dropping again once the current mania ends. There’s good reason to believe that.
What Do Wall Street Analysts Think About SoundHound AI Stock?
Even bulls are likely to admit that SOUN stock has run too hot. The most bullish price target in the past three months — excluding Wedbush’s recent re-rating after the mania — was $10, and the average price target was at $8.1. In my opinion, even $8.1 is quite rich for a stock with SoundHound’s fundamentals.
Wall Street analysts currently see a 52.1% downside over the next 12 months here. We’ll probably see these price targets rise in the coming weeks to keep up with the stock as has been the trend with many other AI startups.
Analysts still see SoundHound AI bleeding cash in the coming years. Full-year EPS is expected to be -$0.38 and improve by 35% next year to -$0.25. They also see sales growing 83% to $84 million for all of 2024 and 96% to $164 million in 2025.
Should You Invest in SoundHound AI?
SoundHound does have solid potential in the QSR industry and they hold just 0.1% of the $14 billion food automation market. There’s huge room for growth here and SoundHound is targeting way industries beyond just automotive and QSR. That said, I do not think all this growth is sustainable with the current level of losses here. Cash is at $136 million and its losses in Q3 were $22 million. The valuation right now is at 62 times sales and 17 times book; this does not account for the risks here.
Moreover, the level of dilution is significant. Outstanding shares were at 246.5 million in Q3 2023 and are now at 369.2 million as of the most recent quarter. This is unlikely to stop soon as the company continues to bleed cash. SoundHound has missed EBITDA estimates in every quarter of the past four quarters, so I’m skeptical that the bottom line is going to improve while the company is still in the very early stages of its growth.
All things considered, the problem isn’t SoundHound, but what you’re being asked to pay for it right now. SOUN stock is way overbought at $17 and the downside risk is massive compared to the potential upside here. I believe you should stay out of it if you’re a value-focused investor and look elsewhere.
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