It’s not often that a stock is rated as a Strong Sell. In fact, according to the TipRanks database, not a single stock currently holds this designation from the analyst consensus. However, one investor thinks there’s a name deserving of such an accolade.
SoundHound AI (NASDAQ:SOUN) has made plenty of waves this year as the voice recognition specialist has been a prime beneficiary of the AI boom, while boasting an endorsement in the shape of a modest investment from Nvidia. Yet, even after retreating substantially from the year’s earlier highs, the shares have still gained 138% this year.
For investor KM Capital, the current valuation just doesn’t add up. According to the investor’s “optimistic discounted cash flow model,” the stock’s fair price is $1.2, a figure that sits 76% below the current share price. That makes the stock a Strong Sell, says KM. (To watch KM Capital’s track record, click here)
Meanwhile with all the hoopla around the Nvidia investment, it should be noted that the chip giant holds less than a 1% stake in the company, with KM thinking the whole story looks like nothing more than “big hype.”
“I do not deny that SoundHound pioneers in a promising industry and its Q1 earnings release was quite strong with the management’s optimistic outlook for 2024 and 2025,” KM concedes. “However, even my extremely optimistic discounted cash flow model showed that the stock is overvalued by several times.”
Add in the fact the company’s cash burn rate remains high, and a recent capital raise has seen shareholders “experience dilution” – a factor which could also weigh on the stock price – and KM thinks the “selloff might be massive.”
While KM thinks his bearish thesis might be at risk if a short squeeze takes place or should one of the tech giants make SOUN an acquisition target, he still thinks the current valuation is unjustified. The sweet spot for buying in remains a long distance away – should the stock fall beneath $1 (amounting to an 80% drop from current levels), KM says he “might consider buying the stock.”
That said, KM’s take contrasts with the Street’s general opinion. SOUN stock boasts a Moderate Buy consensus rating, based on a mix of 4 Buys and 2 Holds. Moreover, the average target remains an optimistic one; at $7.17, the figure makes room for 12-month returns of ~42%. (See SOUN stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
