Is SoundHound AI Stock a Buy in May?

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SoundHound shares have soared in 2024. But is the rally based on hype or substance?

With shares up by an eye-watering 129% year to date, SoundHound AI (SOUN 7.16%) is one of 2024’s hottest technology stocks. The audio-focused artificial intelligence (AI) company has received attention from industry giants like Nvidia, contributing to its meteoric rise. But does the company really deserve the recent hype? Let’s dig deeper to find out.

The Nvidia connection

SoundHound is a voice AI and speech recognition software company founded in 2005. Despite its initial public offering (IPO) — a few months before the launch of OpenAI’s ChatGPT in 2022 — the stock languished in relative obscurity until February 2024, when the megacap chipmaker Nvidia disclosed ownership of 1.7 million SoundHound shares.

Unsurprisingly, the filing kick-started investor interest in SoundHound. Entities usually buy stock because they expect it to be worth more in the future. And Nvidia’s bet on SoundCloud made investors wonder what the giant chipmaker knew that the rest of the market didn’t. That said, there are also some reasons people should temper their enthusiasm.

For starters, if Nvidia really knew SoundHound had some industry-beating edge, why didn’t it simply acquire the whole company? Purchasing SoundHound, with its market cap of just $1.67 billion, would have been light work for the $2.3 trillion chipmaker. But it looks more likely that Nvidia is only privy to the same information as everyone else. SoundHound investors should focus on the fundamentals instead of hype.

Focus on the fundamentals

On the operational side, there is a lot to like about SoundHound. Fourth-quarter sales surged 80% year over year to $17.1 million based on royalties and subscriptions for its AI audio software licensing. SoundHound is working with several blue chip automotive brands like Mercedes-Benz, Honda, and Hyundai, where its voice-assist technology has a clear use case for hands-free control of in-car infotainment.

The tech also synergizes with restaurant drive-thrus, where SoundHound reports notable clients such as White Castle and Jersey Mikes. But it is unclear if these companies are just experimenting with SoundHound’s technology or if they actually plan to implement it at scale.

Image source: Getty Images.

SoundHound also has a problem with its bottom line — generating a fourth-quarter operating loss of $12.4 million. The good news is that this is a 57% drop from the prior-year period. So if the company continues to scale up, it can eventually outgrow this problem.

Is SoundHound AI stock a buy?

On the whole, SoundHound AI looks like a solid company. It boasts a wide array of big-name clients, which could speak to the quality of its software relative to alternatives. And although the Nvidia investment probably doesn’t mean much from a fundamental perspective, it is a nice vote of confidence that could attract even more business to SoundHound.

With all that being said, SoundHound stock is expensive with a price-to-sales multiple of 26 compared to the S&P 500 average of just 2.8.

While it is normal for small, fast-growing companies to have high valuations, SoundHound’s price tag seems to have been unreasonably inflated because of the Nvidia connection. And investors may want to wait for some of the hype to subside before taking a position in the stock.

Will Ebiefung 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.