What goes up often comes down again and that is especially true for overhyped stocks. It’s pretty safe to say SoundHound AI (NASDAQ:SOUN) deserves a place in that cohort. Riding the AI boom and boosted by a modest investment from Nvidia, the stock was one of the best performers in Q1, at one point soaring by 446% in just over a month.
But the comedown right now is looking just as impressive, at least for those watching from the sidelines. In the month since hitting those peaks, the shares have already given back to the market 55%.
Now, this is a situation that raises a common investing question: should one buy the dip on the premise that the pullback represents an opportunity, or should they stay away, considering the stock merely represents a hot trend and lacks the required fundamental qualities needed for long-term investing purposes?
There’s no doubt which side 5-star investor Michael Wiggins De Oliveira comes down on. “I maintain that this stock is not the best way to invest in the hottest area of the market, AI,” he says. “In fact, I know from experience that backing the hottest area of the market leads to significant capital losses more often than not.” Unsurprisingly, then, De Oliveira rates SOUN shares as a Sell. (To watch De Oliveira’s track record, click here)
It should be noted here that it’s not that clever telling investors to run a mile once the stock has been piling on the losses, but fair dues to De Oliveira, as in January, before the hype train left the station, he was already recommending investors stay away.
De Oliveira’s argument is a simple one: the company’s goal of bringing its conversational AI solutions to a plethora of industries such as autos, restaurants and smart TVs can be applauded, but De Oliveira is doubtful it will be able to realize those ambitions.
The bearish arguments include a heavy concentration on only a few key customers and despite an “alluring narrative,” it remains a business that “hasn’t figured out how to successfully monetize its vision.”
Moreover, it has been raising capital at an alarming rate, meaning substantial dilution for shareholders. Why has it been doing so? “Because its balance sheet holds about approximately $11 million of net cash (once the approximately $85 million of debt is factored in), and SoundHound is burning through about $60 million of free cash flow per year,” explains De Oliveira, who remains skeptic about SoundHound being able to “sustainably grow and generate profits.”
“Thus,” he concludes, “I advise investors to exercise caution and avoid this stock.”
De Oliveira’s view, however, clashes with the accepted one on Wall Street. While the stock receives 1 Hold and Sell, each, with the addition of 4 Buy recommendations, the analyst consensus rates the shares a Moderate Buy. There are also plenty of gains projected; at $7.15, the average price target makes room for 12-month returns of 80%. (See SOUN stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
