I keep calling SoundHound AI (SOUN +4.93%) a great company with fantastic technology -- and an overpriced stock.
Has anything changed in the tariff-laden downturn lately, or is this promising stock still too rich for its britches?
SoundHound AI's price moves
As of this writing on Monday, April 7, SoundHound AI's stock isn't exactly following the broader market. That's no surprise, given the stock's hyper-volatile tendencies and lofty beta value of 3.0.
If you're unfamiliar with that data point, a 1.0 value means the stock generally moves in the same direction as the S&P 500 (^GSPC +1.20%) index, at a similar speed. A very high value like 3.0 points to a stock that usually jumps 3 times higher or falls 3 times lower than the S&P 500, measured in daily percentage returns.
That's not the whole story, of course. Otherwise, a high beta would guarantee accelerated price changes, always in the same direction as the broader market. As it turns out, SoundHound AI's stock also has a low statistical correlation with the S&P 500 chart, currently standing at 0.4. A leveraged fund that simply triples the daily return of the S&P 500 gets a correlation value of 0.96 or more, with 1.0 being a perfect match.
Long story short, SoundHound AI's stock makes a lot of big moves, and not always in the direction other stocks are moving on the same day.
Image source: Getty Images.
SoundHound AI is still overpriced
That's enough of my statistical nerdery. In a more practical sense, SoundHound AI's stock is still floating much higher than it should, even after a 68% price drop from mid-December's peak.
It's a very welcome price correction, but it could -- and arguably should -- still go much further down. The stock is still up 48% over the last year, and it looked pricey back then. Traditionalists can take one look at SoundHound AI's valuation and walk away. The price is not even in the same zip code as "reasonable" with a price-to-sales ratio (P/S) of 36 and negative profits across the board.
And the tariff debacle hasn't been very helpful. The S&P 500 fell 9.8% in the two-day span from Wednesday evening to Friday's closing bell. SoundHound AI dropped 10.7% in the same period. That's comparable to the index and far from the 30% drop this stock's risky beta value suggests.
NASDAQ: SOUN
Key Data Points
When will I sound the "buy SoundHound AI!" alarm?
So no, not much has changed lately. I recently restocked my portfolio with the same amount of SoundHound AI shares I had sold in December. But I did it reluctantly, and only because I've already secured enough profit from this stock to take some unreasonable risks. The shares I bought six weeks ago are down by 12% so far. I plan to double down on this position someday, but not until the price has reached an objectively reasonable level.
In this case, I'm looking at SoundHound AI's order backlog of roughly $1.2 billion, divided by the average contract length of six years. You're looking at annual revenues of roughly $200 million over the next six years. A sensible P/S ratio for a high-growth tech stock like SoundHound AI could be approximately 10x to 13x. Using these values as a guide, SoundHound AI's market value should be something like $200 million times 13, or $2.6 billion.
The stock still trades 17% above that target, which is on the generous side of my preferred valuation range anyway. And the conversion of long-term contracts into reportable revenues may not be as simple and smooth as it sounds -- I'm still looking at future forecasts and estimates to some degree. So I'm not ready to go on a buying spree yet.
The situation is getting better, as SoundHound AI keeps growing its order book while the stock price correction continues. But most investors should let this two-step process continue for a while. Call me back when this stock drops to the mid-$6 range. That would be my time to buy more and recommend that others start to build a SoundHound AI position at a halfway decent price.
