There is little question artificial intelligence has been the driving force behind the stock market’s sustained two-year bull market. Carried aloft by the incredible performance of Nvidia (NASDAQ:NVDA), which returned 837% over that time frame — or more than twice the returns of any other Magnificent 7 stock — the S&P 500 trades near its all-time highs.
Although some wonder whether the chipmaker can continue on its growth trajectory, NVDA remains a juggernaut, gaining almost 180% in 2024. For a company worth $3.2 trillion, that’s no easy feat. Few AI stocks have done as well. Palantir Technologies (NASDAQ:PLTR) is certainly one, with its stock soaring 360% this year, yet there is one AI company that’s done even better than Nvidia or Palantir, surging 1,030% over the last 12 months.
SoundHound AI (NASDAQ:SOUN) put on a master class in growth in 2024. It went from being a penny stock in February trading at just $1.62 per share to almost $24 per share today with a market cap of $8.7 billion. SOUN stock has tripled in just the past 30 days alone.
That’s not normal, no matter how much you like a company. So is SoundHound’s rocket ship ride higher just hype, suggesting it’s about to hurtle back to earth, or is the AI stock the real deal? Let’s find out.
24/7 Wall St. Insights:
- SoundHound AI (SOUN) is one of the best-performing stocks, gaining 1,030% in 2024.
- Sales are soaring, but losses are widening and it has been unprofitable for 20 years.
- Its recent gains are more likely due to a short squeeze than improvements in its operations.
- 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.
A high-profile AI voice technology stock
Arguably best-known for its music identification app, SoundHound’s technology possesses real-world applications. Companies including Netflix (NASDAQ:NFLX), Stellantis (NYSE:STLA), and SiriusXM Holdings‘ (NASDAQ:SIRI) Pandora streaming music service have all integrated SoundHound’s AI technology into their products.
Revenue in the third quarter jumped 89% from the year-ago period to $25.1 million as it diversified its customer base. Where its largest customer represented 72% of revenue last year, it accounts for only 12% today.
And yet SoundHound remains unprofitable. Despite a dramatic rise in sales, adjusted losses of $15 million, or $0.04 per share, are worse than the $13 million, or $0.06 per share loss it recorded last year. Adjusted EBITDA losses of $15.9 million were twice the $7.3 million losses last year. Operating losses also doubled year-over year.
Despite being in business for nearly two decades, SoundHound has yet to figure out how to make a profit. The more sales it makes the greater its losses are.
A goldmine of opportunity
Yet there is potential for more sales growth. Grandview Research estimates the global market for voice and speech recognition technology will expand rapidly over the next five years. It forecasts 14.6% compound annual growth between now and 2030 with speech recognition accounting for two-thirds of the increase. Healthcare and electronic medical record demand are expected to drive much of the increase, with the military and banking and financial services also representing significant growth pockets.
But it could be difficult for SoundHound to snare large swaths of the market. It faces intense competition from other AI players, including Microsoft (NASDAQ:MSFT) backed OpenAI, the owner of AI chatbot ChatGPT. Earlier this year it announced it had developed a product called Voice Engine that provides reading assistance and translation capabilities.
Other AI companies that are larger and better financed are also working hard on AI voice recognition.
A fundamental failure of the business
SoundHound is one of the most-shorted stocks on the market. Over 76.2 million shares are sold short, or some 23.5% of its float. It appears much of the gains SOUN made is due to a short squeeze.
Although Wall Street analysts have a buy rating on SOUND stock, they also have a one-year price target on the shares that see it losing half its value over the next 12 months.
While SoundHound AI has potential, until it figures out how to sell its technology at a profit it will remain a high-risk stock. And considering how far it’s come in the past year, there is more downside risk than upside potential.
I can see SoundHound being a takeover candidate, but that does not mean it would attract a premium. Any buyer, if there were one, would wait for SOUN to crash rather than make a bid at its current stratospheric valuation.
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