Stock-Split Watch: Is SoundHound AI Next?

Key Points

• SoundHound AI is one stock in the artificial intelligence (AI) space that has captivated the market with its conversational AI capabilities.

• Stock splits are tools companies can use to change the share price and share count of their stock for numerous reasons.

• 10 stocks we like better than SoundHound AI ›

No sector has been hotter over the past few years than artificial intelligence (AI). The juggernauts in the space like Nvidia and Palantir get the most attention, but other companies are also trying to tap into that same investor enthusiasm. One that has largely succeeded is the AI voice platform SoundHound AI (NASDAQ: SOUN). Its stock has experienced extreme volatility, but overall, it has had a nice run over the last year.

Volatile stocks can be more prone to do stock splits, depending on their price levels. Is SoundHound AI next?

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Understanding stock splits

Before we dive into whether SoundHound AI is the next stock split, investors need to understand what a stock split is and why a company may choose to do one.

Image source: Getty Images.

Stock splits provide companies the ability to decrease their share price and increase their outstanding share count. On the other hand, there are also reverse stock splits, which do the opposite. A reverse or forward split is a way for a company to increase its stock price and lower its share count. In both stock splits and reverse stock splits, the market cap -- and therefore an investor's equity position -- does not change.

For example, if an investor owns 10 shares of a stock trading at $200 per share for a total equity position of $2,000. If the company conducts a 2-for-1 stock split, the investor will essentially receive two shares for each one they own, meaning 10 shares would increase to 20 shares. Then you take the equity position of $2,000, which won't change, and divide by the new share count of 20, arriving at a new stock price of $100. As you can see, the share count rose and the stock price declined.

A stock split can make a stock seem easier to buy for investors and also boost liquidity. This may be an attractive option if a stock just went on a big run and now trades at hundreds or even thousands of dollars per share.

A reverse stock split can be especially handy if a stock is struggling and has run into compliance issues with a major exchange like the Nasdaq Composite (NASDAQINDEX: ^IXIC) or the New York Stock Exchange. Both exchanges require stocks to trade above $1 for at least 30 consecutive trading days, so if a company wants to stay on either exchange, its only option might be to do a reverse split.

Is SoundHound AI next?

Investors have been excited by SoundHound's conversational intelligence AI capabilities, where there are plentiful use cases in automobiles, television, and business use. SoundHound's products and services can be used to enhance and create efficiencies in customer service, smart ordering, and voice assistants. The stock is down nearly 45% this year (as of July 6), but up roughly 165% over the past year.

Trading over $11 with a nearly $4.5 billion market cap, SoundHound AI doesn't appear to be at any risk of breaching compliance issues with the Nasdaq. According to MarketWatch, over 34% of the shares are being sold short, so many investors believe it will decline. That could happen considering the company's multibillion-dollar market cap and lack of any core profitability. A bad environment for stocks could hit companies like this hard.

Still, Wall Street is fairly optimistic about the name. Of the seven Wall Street analysts covering the company, four say to buy the stock, while three say to hold. Perhaps management wants to get the stock price higher to give off the perceived success that other AI stocks have had, but I'm not sure if there's any real need to do this.

The majority of SoundHound AI's shares outstanding are part of the public float, so this, plus the fact the stock trades on a major exchange, should ensure plenty of liquidity. Ultimately, I don't see any real need for management to conduct any kind of stock split right now.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.