Down Nearly 50% From Its High, Is SoundHound AI Stock a Good Buy Right Now?

Investing in artificial intelligence (AI) stocks can sometimes put investors on some wild rides. A great example of that is the highly volatile SoundHound AI (NASDAQ: SOUN). The voice AI company surged an incredible 836% in 2024 after investors learned chipmaker Nvidia was an investor in the business.

The beginning of 2025, however, has been a much different story. As of Jan. 20, the stock has fallen more than 31% out of the gate. Whether investors are cashing out their profits from last year or are simply having second thoughts about the stock and its valuation is the big question right now.

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At the time of this writing, shares of SoundHound AI are trading nearly 50% down from their 52-week high of $24.98. Is this a huge buying opportunity for investors, or could this be the start of a much larger sell-off?

A highly volatile stock with a questionable valuation

Steep and significant swings in value are nothing new for SoundHound AI investors. In the past year, its 30-day average trading volume has fluctuated in a wide range of less than 8 million to nearly 112 million.

SOUN 30-Day Average Daily Volume data by YCharts

The wildly volatile stock is also massively expensive, trading at more than 60 times its trailing revenue and 17 times its book value. This can often happen with highly speculative stocks where hype, rather than fundamentals, is fueling its performance. For potential investors, it also means that they will need to brace for significant and unexpected changes in value, and that can make it an unpredictable stock to own -- one that may not be suitable for risk-averse investors.

While SoundHound has been generating some strong revenue growth, the business still has a long way to go in proving that it's worth the massive premium it's trading at right now.

SoundHound AI is incurring big losses and burning through piles of cash

Investors are likely excited with the growth opportunities SoundHound AI possesses in the long run. Its voice AI system can be used in cars, drive-thrus, and many industries to help create a conversational experience between users and AI, while adding efficiency for businesses.

But there are many risks facing the business today. There's a lot of competition in voice AI and without strong fundamentals and resources to tap into, SoundHound may have trouble winning market share in the long run.

In its most recent period, which ended on Sept. 30, 2024, the AI company grew its sales by 89% to $25.1 million but it incurred an operating loss totaling $33.8 million, which was more than twice the size of the $14.5 million loss it posted a year earlier. And over the past nine months, it has burned through $75.8 million just from its day-to-day operating activities. For a company that reported just $135.6 million in cash and cash equivalents as of the end of the period, that's not a strong position to be in.

SoundHound is likely going to need to spend heavily on sales and marketing to grow its operations in what may be a highly competitive voice AI market. And that can make it even more difficult for the business to turn a profit.

More of a decline could be coming for SoundHound AI stock this year

The stock's early decline may seem like an opportunity for investors to buy shares of SoundHound on the dip, but that can be a dangerous move to make as the stock could fall even more due to its inflated valuation; this recent drop in price merely gives back the gains the stock achieved in December.

SoundHound is a volatile stock to own and with it falling so rapidly in just a few weeks, investors should pay attention to just how dangerous of an investment this can prove to be. It can be incredibly vulnerable to any bad news related not just to its own performance, but also the overall sentiment in the markets. SoundHound's fundamentals aren't strong and until they improve drastically, investors are taking a big risk with the stock. For now, you may be better off avoiding it.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.