Shares of SoundHound AI (SOUN 2.70%) took a steep dip on Tuesday. The company, which uses artificial intelligence (AI) to provide user-friendly voice control tools, had taken an 11% hit as of 3:07 p.m. ET on a consistent downward trend. There was no company-specific news driving this price drop, just a bearish market day undermining the stock's recent gains.
What's going on?
All kinds of market darling stocks fell on Tuesday as earnings reports from the retail sector showed signs of tariff-based inflation. That's bad news for a stock like SoundHound AI. The company is unprofitable and its stock is trading on long-term revenue growth opportunities instead. Even so, SoundHound AI shares are changing hands at 41 times trailing sales -- after Tuesday's sharp price correction.
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Standard operating procedure for growth investors
This is just a normal Tuesday afternoon for richly valued growth stocks and their investors. SoundHound AI is incredibly volatile with a beta rating of 2.8. In other words, the stock tends to move in the same direction as the overall market, but roughly 2.8 times as far in either direction. That wobbly foundation sets the stock up for sudden moves likes today's price cut.
SoundHound AI reported strong second-quarter results earlier this month, adding support to the stock's soaring valuation. But earnings are still negative and it will take years to convert its billion-dollar contract backlog into actual revenue.
At this point, SoundHound AI's stock has gained 168% in 52 weeks but also trades 47% below December's frenzied peak. I believe in the company and its robust AI technology, but the stock still looks overvalued.
