Shares of SoundHound AI (SOUN +4.93%) turned sharply lower Thursday, plunging as much as 13.6%. As of 3:13 p.m. ET, the stock was still down 11.4%.
The catalyst that drove the artificial intelligence (AI) specialist lower was a short report and a rare double downgrade by a Wall Street analyst.
NASDAQ: SOUN
Key Data Points
Worth $1?
A short report issued by Capybara Research titled "Lies, Damned Lies, and Cheeseburger 'AI'" suggests that SoundHound AI is a "failing company peddling lies and deception." It also set a price target of $1.
The report includes a laundry list of issues. Among them, it suggests SoundHound's voice recognition technology is a commodity service that isn't superior to comparable products by Amazon's Alexa or Apple's Siri, among others. The report also cites a growing number of customer defections and SoundHound's mounting losses, with "no clear path to profitability."
Perhaps the most troubling issue is that the company's backlog may be misleading. SoundHound recently revised its definition, saying the subscription backlog "refers to potential revenue achievable," so there's no contractual obligation.
Perhaps not coincidentally, analysts at Cantor Fitzgerald issued a rare double downgrade on the stock today to underweight (sell) from overweight (buy). They set a price target of $4.90, roughly 38% below Wednesday's closing price.
The analysts say the valuation "cannot be justified," while citing a number of the same risks listed in the short report. These include the "opaqueness" of SoundHound's operating model, slowing growth, customer losses, and increasing competition from larger rivals.
Time to sell?
It's always been clear to me that SoundHound AI was a particularly risky stock with no profits and a high valuation. While there's potential, there's also a fair degree of risk and investors should approach the stock with caution. Furthermore, those who don't have a stomach for risk and volatility might be better off selling SoundHound AI.
Investors shouldn't necessarily make investing decisions based on analysts' opinions and short reports. However, if the claims made have merit, investors should take care and remember the old adage, "Where there's smoke, there's fire."
