Down 65% From Its All-Time High, Is SoundHound AI a Buy Now?
Key Points
The voice recognition specialist has been enjoying stellar growth.
At the same time, SoundHound has also had massive operating losses.
Its shares are only slightly more expensive than an average software stock.
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SoundHound AI (NASDAQ: SOUN) isn't in a great place right now. The stock is down around 65% from its all-time high established in December 2024, and it has been on a massive downhill slide as of late. The stock looked like it was heading toward a new high in October when it crossed $20 per share, but now it trades for just a bit over $8.
That's quite a bit of movement in a short time frame for SoundHound's stock, and some may think this justifies picking up shares, as the last time SoundHound AI was this cheap was around the market lows experienced in April 2024 after President Donald Trump's tariff announcements. Market sentiment is much more positive now, so SoundHound AI's stock price should be higher.
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But is there more to the story?
Image source: Getty Images.
It's a long way away from breaking even
SoundHound AI is a rare instance of a pure-play artificial intelligence (AI) stock available in today's market. The use case for SoundHound AI's software is simple: It combines generative AI and audio recognition technology. There are countless ways that can be implemented, but some of the initial industries it was launched in were restaurant and automobile digital assistants. Those are two important use cases, but they are far from its largest.
The biggest area by far would be if SoundHound AI's product can make its way into customer service applications, and it is already seeing some adoption for this role in the financial, insurance, and healthcare industries.
However, investors are unimpressed by SoundHound AI's losses. The market understands that young companies need to operate unprofitably to capture as much market share as possible. But there's a limit to how unprofitable a company can be before the stock is met with a healthy bit of skepticism. SoundHound AI regularly spends about double what it brings in from a revenue standpoint, leading to wide operating margin losses.
SOUN Operating Margin (Quarterly) data by YCharts
That's an extreme operating loss margin, and the market is concerned about those levels despite its strong growth (revenue was up 68% during the third quarter).
SoundHound AI's stock isn't cheap
Even though the market isn't as optimistic on SoundHound AI's stock as it once was, it maintains a premium valuation. Consider the stock's still-expensive price-to-sales multiple below. Most software companies trade for 10 to 20 times sales, so it's just a bit more expensive than the average stock. However, it's also growing at a rapid pace, making SoundHound AI a bit of an outlier.
SOUN PS Ratio data by YCharts
I think SoundHound AI makes for an OK investment pick, but investors must understand the risk that being this unprofitable brings. It will be difficult for SoundHound AI to break even, but if it does, its stock could deliver monstrous returns.
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Keithen Drury has positions in SoundHound AI. The Motley Fool has positions in and recommends SoundHound AI. The Motley Fool has a disclosure policy.
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