Don't Buy SoundHound AI Stock Before You Read This Warning

The promise of artificial intelligence (AI) has not just fueled share price gains for the "Magnificent Seven" stocks, but also for a group of smaller, pure-play AI stocks. Some of these have generated excellent returns in a short time for investors -- among them, conversational AI company SoundHound AI (NASDAQ: SOUN). Its share price is up by around 45% from where it traded when it went public through a reverse merger with a special purpose acquisition company (SPAC) in August 2022.

That's actually well behind the 70% total return that the broad S&P 500 index delivered over that period. However, shareholders who bought the stock between late 2022 and early 2024 are sitting on much higher returns. It's up by about 1,000% from where it sat three years ago, in December 2022.

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What does SoundHound AI do?

SoundHound AI provides intelligent voice recognition and conversational capabilities for use cases such as customer service, in-vehicle voice assistants, and food ordering and delivery. Its newer systems also boast agentic AI capabilities that can create what it describes as a "more natural voice experiences for customers."

SoundHound AI is now working with a (thus far unrevealed) sports car company to create a "personality" for its in-vehicle AI voice assistant.

While SoundHound AI has immense potential, investors shouldn't buy the stock -- at least, not until they read this warning.

It's a big bet

SoundHound AI shares today are clearly overvalued based on its price-to-sales ratio. The company has a $4.7 billion market cap and is projecting about $173 million of revenue this year, giving it a forward P/S ratio of about 27. And one can't measure it all on a price-to-earnings basis because it's losing money, although through the first nine months of 2025, the company did manage to cut its losses in half year over year.

Now, on its own, a high valuation may not be enough of a reason for investors to shun a stock. SoundHound AI is growing its revenues rapidly. In fact, many younger tech companies that are expected to be disruptive are rewarded with high sales multiples even while they are losing money to focus on rapid growth. But this also means investors who buy those stocks are in a high-risk, high-potential-reward situation.

While the market is betting that SoundHound AI's early mover advantages in the conversational AI arena will position it to quickly gobble up market share, investors still have questions regarding the extent of AI's capabilities.

There are also questions about how effective SoundHound AI will be at warding off competition. Just because a company is first to market doesn't automatically mean it will be a long-term winner. If its products don't live up to the hype or if rivals roll out better options, this stock could have a long way to fall from its current lofty valuation.

Ultimately, there may be a compelling case to be made for investing in this stock, but it carries significant risks. In a few years, investors could look back on this stock as having been very cheap today... or very expensive.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends SoundHound AI. The Motley Fool has a disclosure policy.