Stock-Split Watch: Is SoundHound AI Next?

Key Points

• Stock splits are a tool used by companies to change their stock price or outstanding share amount.

• They tend to occur if a stock has risen or fallen significantly.

• SoundHound AI has been a volatile stock, leaving some investors to wonder if a stock split or reverse stock split could be coming.

• 10 stocks we like better than SoundHound AI ›

Stock splits are a tool used by publicly traded companies to adjust a company's share price and share count. Companies tend to conduct stock splits for a specific reason and usually after the stock has made a significant move over time. These moves also tend to elicit interest from the market.

The conversational artificial intelligence company SoundHound AI (NASDAQ: SOUN) has been one of the smaller companies piggybacking on the AI revolution. While the company has generated good returns for shareholders over the past five years, the stock has also been volatile. Is a potential stock split on the horizon?

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What are stock splits and reverse stock splits?

As mentioned above, stock splits are a way for companies to change their stock price and outstanding share count. Investors need to understand that stock splits and reverse stock splits don't change the market cap of a company, so the equity value of an investor's position doesn't change either.

A stock split lowers the share price and increases the amount of outstanding shares. For instance, let's say an investor owns 20 shares of a stock trading at $200 per share for a total value of $4,000. If the company decided to conduct a two-for-one stock split, it would give investors two shares for each one they own. This means the investor's 20 shares would increase to 40 shares. The equity value doesn't change, so the share price decreases to $100 per share ($4,000/40).

Companies typically conduct stock splits if their stock has gone on a big run and now trades for hundreds or even thousands of dollars per share. The company may want the stock to feel more attainable, and stock splits can also increase liquidity. On the other hand, reverse stock splits increase the price per share and lower the share count.

The main reason to conduct a reverse stock split is if a stock on a major exchange like the New York Stock Exchange or Nasdaq is out of compliance with the exchange's rules. If stocks on the NYSE or Nasdaq trade below $1 per share for 30 consecutive trading days, it could risk eventual delisting if the issue is not corrected. If a company's stock has fallen below $1 but management thinks it can turn things around and want to remain on a major exchange, a reverse stock split can be useful.

Will SoundHound AI soon do a stock split?

SoundHound provides companies with conversational intelligence capabilities that companies can use to improve their customer experience. Use cases include chatbots in automobiles, ordering food or other products and services, and assisting with customer issues in a more efficient manner.

SoundHound currently trades at a roughly $5 billion market cap and over $13 per share, so the company isn't having any compliance issues right now. However, within the last five years, the stock has actually touched close to $1 per share on several occasions. According to MarketWatch, most of the company's outstanding shares are publicly traded, so liquidity doesn't seem to be an issue. However, over 30% of the public float is being shorted by investors, meaning they think the stock will go down.

In its second quarter earnings report, SoundHound reported a net loss of $0.19, down from a net loss of $0.11 one year ago. The adjusted net loss, however, was only $0.03 per share, a penny better than last year. Revenue of nearly $43 million rocketed 217% year over year.

I didn't find any evidence of SoundHound conducting any stock splits in the past. Ultimately, as things stand now, I don't see the company jumping to do any kind of stock split or reverse split. The only way a reverse split would be needed is if the company lost most of its value, driven by some kind of plunge in AI stocks or company-specific failure. But none of that strikes me as likely right now.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.