It has been a great year for tech stock SoundHound AI (NASDAQ: SOUN)stock, which more than doubled in price thus far in 2024. But recently, it has been seeing some apprehension from investors. In the past three months, SoundHound’s stock has fallen by more than 25%.
And this recent dip in price could be just the start of a much larger sell-off. Investors who are bullish on the company’s prospects due to Nvidia‘s backing and investment in the company may want to think twice about whether the stock is worth buying at these levels. There’s a recent development in the tech world that could sour growth investors even more on SoundHound’s future.
OpenAI has an even better chatbot
SoundHound AI uses artificial intelligence (AI) to help create a conversational experience between users and technology. Whether that’s in drive-thrus or inside vehicles, making hands-free access easier, investors see the stock as a big AI play, especially with Nvidia appearing to be a believer in the business.
But a big risk for investors is that SoundHound AI won’t be alone in the space. There are some formidable tech companies it will have to battle with for market share. One particularly concerning one is ChatGPT-maker OpenAI.
Open AI recently launched a new model, GPT-4o, which is even faster and has greater capabilities than GPT-4. There are enhanced voice capabilities as well. The new AI model can sing and translate conversations. And the speed at which it can do these things is what puts an exclamation mark on these features; it can respond to prompts in just 232 milliseconds, which is comparable to a human’s response time.
The consequence is that OpenAI already has a highly sophisticated AI model, and now, with fast voice capabilities as well, it could pose a serious threat to SoundHound AI’s growth prospects. Tech giant Microsoft is already a big backer in OpenAI, investing $13 billion into the promising AI company.
While there is arguably a lot of room for many AI companies to grow, investors may be expecting a bit too much from SoundHound AI given both its valuation and how quickly the stock has taken off this year.
SoundHound AI’s stock is expensive given the risk it faces
SoundHound AI generated some strong growth in recent quarters, but overall, its numbers still aren’t all that high. For the first quarter, which ended on March 31, the company reported 73% revenue growth, with its top line coming in at $11.6 million. While the overall growth rate is impressive, the modest top line suggests the business is still relatively unproven. And the revenue was lower than what SoundHound AI reported in each of its two previous quarters — $17.1 million in the fourth quarter of 2023 and $13.3 million in the third quarter.
Meanwhile, SoundHound AI’s business remains unprofitable. The company incurred a net loss of just under $97 million in the trailing 12 months. And during that time, it also burned through $75.7 million just from its day-to-day operating activities. As SoundHound invests more into its operations to help compete among larger tech companies, both its losses and its burn rate may worsen, making the stock an even riskier investment in the process.
SoundHound’s stock trades at a fairly rich 25 times trailing revenue, and it arguably should trade at more of a discount in light of the risk the business faces in the long run.
Is SoundHound AI stock a buy?
SoundHound AI’s stock has been a hot buy this year, but that’s largely been due to the news that Nvidia invested in its business. On its own merits and fundamentals, SoundHound AI probably wouldn’t be doing nearly as well. And investors should always keep that in mind — how the business is actually performing and what risks it’s facing.
While it may be exciting to invest in up-and-coming AI stocks, it can also be risky to do so — there will be a lot of businesses that may not survive in the long run. It’s too early to tell whether SoundHound AI will prove to be the real deal, which is why investors may want to consider taking a step back from the stock, as its fundamentals don’t provide any assurances that it’s on the right track.
It could be a long, tough road ahead for SoundHound AI, and unless the company’s financials improve significantly, it wouldn’t be surprising to see its shares continue to fall in the weeks and months ahead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
This Could Spell Trouble for SoundHound AI Stock was originally published by The Motley Fool
From: Yahoo.com
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