SoundHound AI: Buy or Sell in 2025?

Smaller artificial intelligence stocks have seemingly gone parabolic at the close of 2024, especially those that have been backed by Nvidia (NASDAQ: NVDA) in the form of an investment. Although Nvidia invested a mere $3.7 million in voice-AI start-up SoundHound AI (NASDAQ: SOUN) about a year ago, that investment put SoundHound squarely on the map as a potential AI winner.

After making several accretive acquisitions and racking up an impressive customer list, SoundHound's stock has soared in recent weeks.

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Is this price increase a signal that SoundHound could be the next "killer app" AI platform? Or is it a sign of a bubble waiting to burst?

Why SoundHound has made a big noise lately

SoundHound appears to have achieved escape velocity as the go-to voice-enabled AI system outside big tech, especially within the automotive and quick-serve restaurant (QSR) verticals. SoundHound has landed seven of the top 20 QSR brands, including heavyweight Chipotle, for things like phone and drive-through ordering. In automotive, SoundHound's voice AI is now embedded in many leading auto brands such as those owned by car giant Stellantis, as well as four major electric vehicle manufacturers as of last quarter.

In addition to those two big verticals, this past summer's acquisition of Amelia, another voice-based start-up for enterprises, has boosted SoundHound's enterprise platforms both for customer service applications and employee-facing IT AI applications.

Why SoundHound has an early lead in voice AI

While the generative AI craze has only been happening for two years, SoundHound has actually been around since 2005, and first released its Houndify voice AI platform 10 years later in 2015. So, the company has been developing this technology for a long time.

While SoundHound does incorporate other third-party large language models into its products when necessary, it has distinguished itself by building its own proprietary model called Polaris. Polaris is built on its two decades of experience spanning billions of conversations and millions of hours of audio in dozens of languages.

SoundHound has only been building Polaris since LLM training was available, but the platform is already in use for one-third of the company's restaurant ordering transactions, while management aims to eventually use Polaris in all of SoundHound's interactions across its platform.

In the age of AI, having proprietary data to build one's own model or augment a general-purpose LLM -- in this case, SoundHound's billions of voice transaction data going back decades -- should be a competitive advantage.

SoundHound recently upped guidance

On its mid-November third-quarter earnings report, SoundHound boasted impressive 89% revenue growth. But what was especially encouraging was its increase to the 2024 and 2025 outlook. Management increased full-year revenue guidance to between $82 million and $85 million, and 2025 guidance to a range of $155 million to $175 million. That was an increase from the prior quarter's guidance of $80 million for 2024 and $150 million for 2025.

Certainly, the 100% projected growth shows SoundHound has a lot of momentum -- possibly accelerating momentum. While operating losses also more than doubled from $14 million to $33 million last quarter, that's a relatively manageable level of investment for a company with that kind of top-line business growth.

Image source: Getty Images.

But danger lies in investing in SoundHound today

Of course, just because SoundHound has an early lead in this vertical doesn't mean you should buy the stock right now.

The biggest reason for caution is the company's valuation. After all, the stock has gone up five times, or 400%, in just the span of two months! Today, SoundHound's market cap is an eye-watering $9 billion as of this writing. So, even if SoundHound exceeds its 2025 guidance by 25% and reaches $200 million in revenue next year, that would put the stock at 45 times next year's sales. That's a crazy valuation, anticipating extremely high growth for many years.

Moreover, the rapid increase in price doesn't appear to be totally driven by fundamentals. Over the past two months, there has been a mania in a lot of next-generation technology stocks in AI software, quantum computing, and cryptocurrency. While a lot of these stocks have compelling stories and technology, it will be years, in some cases many years, before they begin to earn any substantial profits.

Specifically, there could be a bit of meme stock trading pushing shares. As of the end of November, SoundHound had a 22.1% short interest, which is very high. Meme-style investors on message boards may be taking advantage of the high short interest by bidding shares up higher into the end of the year, forcing short-sellers to cover their position.

As shares have rocketed higher, sell-side analysts have also weighed in, increasing their share-price targets accordingly. While that shouldn't be ignored, it is sometimes the case that analysts follow the stock price rather than lead it. One only has to look back to the software bubble of 2021 to find a similar phenomenon, before that bubble burst in the next year.

A high valuation driven in part by short-covering is a dangerous setup, as meme stocks can often crash once the party is over. From a longer-term perspective, a high valuation is a risk to investors if anything should go wrong, such as an unexpected slowdown, unanticipated competition, or a rise in interest rates. While SoundHound appears to have big lead, one can be sure large tech giants will aim to compete with the company if the voice AI sector is that large and attractive.

SoundHound looks like a great company -- the stock, not as much

SoundHound has impressed recently by diversifying and growing its customer base while also developing its own proprietary voice AI model. That makes the stock worth knowing. However, a sky-high valuation perhaps pushed by nonfundamental factors over the past month makes the stock a no-go for now.

If shares fall significantly while the business continues to improve, SoundHound may be an attractive buy one day. However, investors should be cautious with the stock and be patient for a (much) better entry point to present itself.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.