There’s a great deal to like about Soundhound AI (NASDAQ:SOUN) stock at this point. Its exposure to the AI megatrend, alliance with Nvidia (NASDAQ:NVDA) and strong, overall growth are all in its favor.
However, given the stock’s recent, overdone rally, along with the name’s extremely high valuation and significant competition, I recommend that investors hold the shares but avoid buying them.
Soundhound AI Stock’s Many Positive Attributes
Soundhound, which produces an AI-powered voice assistant used by businesses, is benefiting from being part of the AI megatrend that is being embraced by investors and many companies. Partly as a result of this situation, Soundhound AI stock soared 157% between the beginning of the year and the afternoon of July 11.
The fact many companies seek to save money by implementing AI-powered tools likely helped Soundhound successfully convince many to adopt its offerings. That is a huge factor behind Soundhound’s impressive growth. Last quarter, the firm’s top line surged 73% versus the same period a year earlier to $11.6 million while its cumulative subscriptions & bookings backlog soared about 80% year-over-year to a very impressive $682 million.
Finally, Soundhound’s alliance with Nvidia boosted SoundhoundAI stock while also lifting financial results. In February, the chip giant disclosed that it purchased almost $3.7 million of Soundhound AI stock. The information undoubtedly lit a fire under Soundhound’s shares, as its stock surged from $2.26 on Feb. 14, the day before the news was disclosed, to $8.24 on March 18. Although the shares subsequently sharply retreated, Nvidia’s investment in Soundhound has put the latter company on many investors’ radar and made them excited about its outlook.
Also importantly, the company’s association with Nvidia has undoubtedly helped it obtain more customers since firms are likely impressed by the investment.
Afterall, Soundhound’s list of customers is impressive. Among them are Applebee’s, Church’s Chicken, Stellantis (NYSE:STLA), Honda (NYSE:HMC) and Hyundai (OTCMKTS:HYMLY).
A Potentially Overdone Rally
On July 10, SoundHound announced Stellantis began including “its SoundHound Chat AI voice assistant with integrated ChatGPT” in its “Peugeot, Opel and Vauxhall vehicle brands across 11 European markets.” The news sparked a huge rally in SoundHound AI stock.
Not surprisingly, SoundHound did not reveal the financial terms of the deal. But as a longtime investor in BlackBerry (NYSE:BB), I know the royalties software makers obtain from auto companies can be quite low. For example, BlackBerry historically only received $1.50 to $5 per vehicle for its infotainment offering. It also received as little as $5 per vehicle for its more advanced technologies.
What’s more, SoundHound began providing voice AI systems for Stellantis last year. That means this new deal may not produce large revenue increases for the tech firm.
Valuation and Competition
By any measure, the valuation of Soundhound AI stock is quite elevated. The shares have a forward price-to-sales ratio of over 17 times. Its enterprise value-to-revenue ratio is a gigantic 30.5 times.
As I noted in a previous column, the company reportedly has many competitors. Amomg them are Alphabet (NASDAQ:GOOG, GOOGL), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). Further, a company called Cerence (NASDAQ:CRNC) is said to have taken automotive customers away from Soundhound in the past.
The Bottom Line on SoundHound AI Stock
I believe that SoundhoundAI has a bright future. However, given the company’s high valuation, its many tough competitors and the market’s exuberance about its deal with Stellantis, I expect the shares to drop significantly below their current levels in the medium term.
Such a downturn could occur because Soundhound reports weaker-than-expected quarterly results or because it loses a key customer. Alternatively, a correction by the stock market could cause the company’s share price to drop sharply.
Consequently, I recommend investors wait for a meaningful pullback before pulling the trigger rather than chasing it in the wake of its recent rally. However, investors who already own the shares should hold onto them.
On the date of publication, Larry Ramer held a long position in BB. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.