Shares of SoundHound AI (SOUN 2.45%) fell 20.6% in March 2024, according to data from S&P Global Market Intelligence. A disappointing fourth-quarter earnings report played a significant role, but the stock was also primed for extreme volatility after skyrocketing gains in February.
How Nvidia's investment turned heads -- but not profits
The provider of voice control systems driven by advanced artificial intelligence (AI) tools raised eyebrows in February, as AI giant Nvidia (NVDA 2.33%) disclosed a small investment in SoundHound AI's stock. The stock more than quadrupled due to a modest $3.7 million investment, as market watchers jumped to the conclusion that Nvidia must have bigger plans in mind.
But Nvidia's and SoundHound AI's earnings reports came along, and neither company's management mentioned this investment in their earnings calls. Moreover, SoundHound AI fell short of Wall Street's consensus targets across the board. Revenue rose 80% year over year, but the average analyst was looking for an 87% jump. This report was published after the closing bell on Leap Day.
So SoundHound AI's stock started March with a 19% single-day price drop. From there, the stock surged 45% higher between March 11 and March 13, only to lose these gains the next week. Both the mid-month rise and later plunge sprung from analyst reviews of Nvidia's stock. SoundHound AI's chart barely moved when the company expanded its voice-control partnership with Stellantis (STLA 2.48%).
NASDAQ: SOUN
Key Data Points
The ups and downs of betting on small-cap AI experts
I like SoundHound AI's place in the emerging AI market and expect impressive business growth in the long run. But I'm also prepared for sudden price drops and operating challenges as the tiny company grows into its breeches.
With a modest $1.6 billion market cap, SoundHound AI still trades at 35 times trailing sales with no profits to speak of. Besides the Nvidia connection, SoundHound AI's market value currently rests on a $661 million backlog of unfilled orders under five-year service contracts. The key to owning this volatile stock is to watch the backlog figure grow (it stood at $341 million in the third quarter) and convert into bankable revenue as the contract terms play out.
Until that backlog-based revenue scales up significantly, SoundHound AI's stock chart may resemble an adrenaline-pumping thrill ride. There could be a sharp drop behind every steep climb over the next few years, and vice versa. I'm fine with a bumpy, lumpy road ahead, as long as the order bookings continue to pile up.
In other words, last month's 20.6% price drop should be seen as a buying opportunity, but keep your eyes open for even steeper price swings in the future. After all, SoundHound AI's stock price is still up by 254% over the last two months.
