Nvidia Dumps SoundHound AI Stock: Should You Do the Same?
When SoundHound AI (NASDAQ: SOUN) first soared in popularity last year, it was because chipmaker Nvidia revealed that it owned more than 1.7 million shares of the up-and-coming tech company. Many investors followed suit, buying shares of SoundHound in the hopes that it would be the next big tech stock to benefit from the artificial intelligence (AI) boom.
In February, however, Nvidia’s latest filings showed that it no longer held a position in SoundHound. Many other investors have also been selling their stakes in the voice AI company. The stock now trades for less than $10 and since the start of the year, it lost more than half of its value.
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Should you also get out of this AI stock, or could this sell-off be a great buying opportunity?
The business is growing, but profits are nowhere in sight
SoundHound AI has a lot of potential, as its voice AI platform can help improve efficiency at drive-thru restaurants and be utilized in vehicles. But the problem is that the business isn’t profitable. SoundHound AI is generating strong revenue growth, that has come recently as a result of the acquisitions of AI companies Amelia and SYNQ3.Amelia was a particularly key acquisition, as it enabled SoundHound to enter more verticals and diversify its customer base.
A troubling trend for SoundHound is that its operating losses have often been higher than its revenue. While there will be some growing pains as the business scales, this pattern isn’t sustainable, and that could lead to further declines for the stock.
SOUN Revenue (Quarterly) data by YCharts.
The company is burning through cash. In January, it filed documents indicating that it may raise up to $500 million through a mixed shelf offering. If SoundHound’s financials don’t improve drastically, the need for more capital raises may be inevitable, leading to further dilution for existing shareholders. At a time when there are a growing number of competitors in AI, SoundHound may need to spend aggressively to keep up, and that may only intensify its needs to raise more cash in the future.
SoundHound’s valuation remains incredibly high
Even though SoundHound’s valuation has been plummeting of late, it still isn’t a cheap stock to own. It’s trading at a price-to-sales (P/S) multiple of 43, and its price-to-book ratio is over 12. If you’re buying the stock today, you’re paying a hefty premium for what still looks to be an unproven business.
While SoundHound’s recent acquisitions may help grow the top line and potentially bring down the stock’s P/S multiple, without a compelling reason to believe that the business has a path to profitability, its $3.5 billion market cap may still prove to be too expensive for many investors.
Is SoundHound AI stock worth the risk?
Retail investors have been hoping that SoundHound could be the next big AI stock, but that doesn’t appear to the case, at least not now. While the stock is still showing gains of 42% in the last year, investors look to be having second thoughts, especially now that Nvidia no longer has a significant stake in the business. That volatility is a risk investors take when following what other investors and companies do, rather than investing in a business based on its own fundamentals and merits.
While I wouldn’t rule out a rally for SoundHound in the future, it may be unlikely to happen if the company’s financials don’t improve significantly. This was a highly risky stock when it first skyrocketed last year, and not much has changed since then. Unless you’re a contrarian investor who has a high risk tolerance, you may be better off passing on SoundHound and looking at safer growth stocks to buy instead.
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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.