Why Is SoundHound AI Stock Dropping?
It's been an extremely volatile year for artificial intelligence (AI) specialist SoundHound AI (NASDAQ: SOUN). In mid-February, investors learned that chipmaker Nvidia owned a stake in the company. While the investment was modest, at 1.73 million shares currently worth $6.6 million, the stock surged, pushing its year-to-date gains to 320% by March 15.
Since then, however, SoundHound AI dropped nearly 57% from its high, as a trio of issues has weighed on the stock.
1. A frothy valuation
At its peak, SoundHound AI stock was selling for roughly 45 times sales, a frothy valuation under most circumstances. While the company has generated impressive revenue growth -- sales jumped 47% in 2023 -- SoundHound AI has yet to generate a profit. The company is making progress in that regard, cutting its loss nearly in half.
Still, many investors saw the opportunity to take profits after the stock quadrupled in less than three months.
2. Investors lost confidence
Two catalysts occurred within 24 hours of each other that sent a shiver through SoundHound investors.
First was a short report by Capybara Research titled, "Lies, Damned Lies, and Cheeseburger 'AI'." The report alleges, among other things, that:
SoundHound has misled investors about the quality of its AI, which is subpar.
The company is hiding the loss of some of its biggest customers.
SoundHound admitted to "material weaknesses in its internal control over financial reporting," which is accounting-speak for sloppy underlying financials.
The day after the short report surfaced, analysts at Cantor Fitzgerald double-downgraded SoundHound to underweight (sell) from overweight (buy), citing several of the same issues raised in the short report.
That one-two punch sent some investors fleeing.
3. A fresh capital raise
Earlier this month, SoundHound announced it would sell $150 million in stock. The at-the-market equity sale will dilute existing shareholders by about 10%. SoundHound ended 2023 with just $95 million in cash after burning through $148 million during the preceding two years.
At 19 times sales, the valution is more reasonable, but SoundHound AI remains a risky stock.
Should you invest $1,000 in SoundHound AI right now?
Before you buy stock in SoundHound AI, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $518,784!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 15, 2024
Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Why Is SoundHound AI Stock Dropping? was originally published by The Motley Fool
