SoundHound AI (SOUN 11.32%) has been one of the hottest artificial intelligence (AI) stocks to own this year. Its stock price performance in 2024 has nearly doubled Nvidia's -- 154% versus 81%. Coincidentally, it was news that the chipmaker invested in SoundHound which led to the stock's surge in popularity earlier this year.
However, in recent weeks, SoundHound's stock has started to give back some of its impressive gains. And although it's still sitting on some strong returns for the year, it is now down more than 47% from its all-time high of $10.25.
Given this recent pullback, is now a good time to invest in SoundHound AI?
NASDAQ: SOUN
Key Data Points
SoundHound's business is promising, but it contains risk
SoundHound has the potential to be a great AI business by creating conversational experiences between AI and a company's customers. A prime example is the ordering process at drive-thrus, where SoundHound's technology can improve speed and accuracy.
Some top brands that are using the company's platform include White Castle and Krispy Kreme. Electric vehicle makers also use SoundHound's platform to help offer a better hands-free experience to drivers.
The company's most recent results have been encouraging, with an 80% increase in revenue from the previous year. Sales of $17.1 million for the last three months of 2023 dwarfed the $9.5 million the company generated in the prior year period. For the full year, revenue totaled $45.9 million and rose by 47%.
The business, however, remains unprofitable with its net loss last quarter totaling $18 million and being higher than revenue. Its high research and development costs ($12.7 million) and general administrative expenses ($7.6 million) were easily enough to wipe out any hopes of a profit for SoundHound last quarter, without even factoring in its sales and marketing costs ($4.5 million) and cost of goods sold ($3.9 million).
While high costs aren't unusual for up-and-coming businesses, investors should pay close attention to steep losses, especially when the losses are more than revenue. The positive is that operating expenses did come down by 23% versus a year ago.
However, without stronger financials, investors face the risk that the company needs to rely on stock issues to fund its operations, which leads to dilution and puts downward pressure on the share price.
The stock still trades at a high premium
Although SoundHound's stock price has fallen in recent weeks, that doesn't mean it's cheap. Currently, it's trading at a hefty price-to-book multiple of 130 and nearly 30 times sales.
Investors are taking a bit of a leap of faith in believing that the company's AI platform will lead to much more revenue growth down the road. Simply because the company has achieved strong growth thus far doesn't mean that it will continue. As its revenue gets higher, achieving a high growth rate will become more difficult. And competition is also sure to be fierce given the attractive growth potential in AI.
Should you invest in SoundHound AI stock?
Having the backing of Nvidia has given investors some hope that SoundHound could be the real deal. But that doesn't mean it is a safe buy. While Nvidia can afford to take on the risk, that doesn't mean SoundHound is a suitable investment for regular investors.
Valued at less than $2 billion, it is still a fairly small mid-cap stock. And given that many investors might already think it's too late to invest in AI stocks like Nvidia and other more established companies, it's easy to see why SoundHound can make for an enticing option right now. But while there is potential here, given the risk that comes with the stock, this is by no means a slam-dunk buy, and I wouldn't suggest investing money that you can't afford to lose.
If you invest in SoundHound AI stock and are comfortable with the risk, be prepared for continued volatility.
