Shares of SoundHound AI (SOUN -1.17%) plunged 28% during April, according to data provided by S&P Global Market Intelligence. The company plans to sell shares, which investors didn't like. And it's clear that excitement over artificial intelligence (AI) is starting to fade, at least a little bit.
According to a filing on April 10, SoundHound decided to sell $150 million of its stock through five different financial institutions which will act as sales managers. These will find buyers for shares at market prices and will receive 2.5% of the gross proceeds.
SoundHound's management says the first $55 million raised will go toward general company purposes, which may include acquiring other companies. The next priority is repaying debt. And if there's any money left over, it plans to invest the money in interest-bearing accounts.
Is this a well-timed move for SoundHound?
SoundHound was already what I'd call an expensive stock at the start of the year. However, Nvidia was revealed to be an investor in the company earlier this year. This investment along with general bullishness for AI stocks fueled excitement and pushed the valuation for SoundHound stock even higher -- it's more than doubled year to date and sits at a pricey price-to-sales (P/S) valuation of 26.
SOUN PS Ratio data by YCharts
I think one could easily make the case that SoundHound stock is overvalued, which is why the equity raise makes a lot of sense -- the company can serve shareholders by raising money right now, even if investors reacted negatively to the move.
In early 2023, SoundHound took out a term loan with a rate that fluctuates. As of Dec. 31, the interest rate was roughly 14%. It had $84 million outstanding on its loan at the end of the year and had paid nearly $18 million in interest in 2023. Getting this paid off by selling its stock at a favorable valuation will improve the business and benefit shareholders, in my view.
After all, SoundHound only generated revenue of $46 million in 2023 -- an interest expense of nearly $18 million is enormous in comparison.
Is AI buzz fading?
SoundHound stock was down in April in part due to this stock sale announcement. But buzz for AI stocks also seems to be fading, which contributed to the drop for SoundHound stock as well.
This was entirely predictable -- investors frequently get too excited about a secular trend before becoming bored with it. By contrast, successful long-term investors must learn to quiet emotions and rationally make decisions based on the business.
SoundHound's next business update is scheduled for May 9. For 2025, the company is projecting $100 million in revenue and positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's making progress toward that profit goal already with improvement in its gross margin and a big reduction in spend for research and development.
In coming quarters, investors should watch for ongoing gross margin improvement. But they should also monitor revenue growth because sometimes cutting spend on research can lead a company to fall behind competitors.
