Is SoundHound AI a Buy?

Computerized voice control expert SoundHound AI (NASDAQ: SOUN) has been on a wild ride over the last couple of years. Is it still behaving like a meme stock, or is it time to start buying this promising artificial intelligence (AI) developer yet?

SoundHound AI's business

This company has been around for decades. The SoundHound app started collecting audio data for AI analysis in 2006 under the name Midomi. The song-recognition engine evolved into a powerful voice recognition system over time, adding language analytics to create a generally useful "speech-to-meaning" tool.

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After adding a couple of global car companies to its client list, SoundHound broadened its horizons. The company changed its name to SoundHound AI and went public in the spring of 2022, by way of a special purpose acquisition company (SPAC) merger. The move added $90.7 million to SoundHound AI's balance sheet, preparing the company for a more intense customer search.

The volatile stock

The generative AI boom started seven months later. OpenAI released ChatGPT 3.5 in late November 2022, kick-starting a game-changing economic boom. SoundHound AI was too small and obscure to take advantage of this sector-boosting catalyst, and the stock gained 42% over the following year. By contrast, leading AI hardware provider Nvidia (NASDAQ: NVDA) saw share prices soar 194% in the same period.

But that mellow mood was about to change. In early 2024, Nvidia disclosed a small investment in SoundHound AI stock. The stock skyrocketed on the news. SoundHound AI's stock price quadrupled in four short weeks as investors expected Nvidia to either buy the company or announce a deep, lucrative partnership.

The bullish projections never came true, and SoundHound AI's stock chart pointed downward again. But the seed had been sown for an even quicker price spike. SoundHound AI was now popular enough to gain traction on social media channels with market-moving powers.

One such group hoped to create a money-making short squeeze, forcing bearish investors to cover their short positions on the stock. The effort lifted share prices from less than $5 to more than $24 per share, peaking near the holidays.

It's unclear whether any of the short-squeeze investors made real money this way, because the amount of short-selling only showed a temporary dip. The short interest returned to all-time highs in March and has stayed high ever since.

Where does SoundHound AI's stock stand today?

The meme-stock surge SoundHound AI experienced last fall may be over, but the ingredients for another artificial push are still in play. The short-sale interest stands at 32%, making it one of the most shorted stocks on the market today. The stock price has doubled in 52 weeks, but it's also down 62% from the peak of late December 2024.

I have said that SoundHound AI could be a buy again if the share price ever drops to roughly $6. That would be roughly 40% below its price on June 12.

To be fair, SoundHound AI's "buy" button could also earn my clicks by showing significantly stronger business results. There is some progress to report there. Trailing sales are up to $102 million nowadays, compared to $51 million a year ago. However, the company posted negative free cash flows of $107 million over the last four quarters -- much worse than the $76 million cash burn seen in the same year-ago period.

Image source: Getty Images.

Is SoundHound AI a buy now?

There is more nuance to the story, of course. SoundHound AI keeps growing its customer list and signing more multiyear contracts. A beefy backlog of unfilled orders should convert into robust revenue growth over the next five years and maybe more. Recent additions include global banks, large healthcare systems, American fitness chains, and Japanese information security experts. It's an exciting growth story, even if most of the money-making results aren't showing up in financial statements yet.

So the $6 share price target may be too strict, but the current price of nearly $10 per share is still a bit much. I'll hold on to some spare cash, just in case SoundHound AI posts a sharp price correction in 2025 -- or maybe the second-quarter report in August will give me enough financial substance to motivate a higher stock price.

For now, I'm happy to just hold on to the SoundHound AI shares I already own.

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Anders Bylund has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.