SoundHound AI (SOUN) has been among the best stocks over the past 12 months. Up 926%, it’s topped only by a few companies, notably those in quantum computing. While SoundHound AI is well-positioned to disrupt the market, the company’s valuation is truly astronomical. It appears to be priced beyond perfection, with little opportunity to justify this valuation in the medium term. That is why I’m bearish about the stock.
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SoundHound Is Positioned for Disruption
While bearish on the stock, I recognize that SoundHound AI is well-positioned for market disruption. The company’s commitment to advancing conversational artificial intelligence (AI) in both consumer and enterprise spaces illustrates its potential and capacity to lead during this generational technological shift.
SoundHound’s proprietary Polaris AI model is at the core of its disruptive potential. Developed over two decades and trained on billions of human conversations, Polaris boasts impressive accuracy and multilingual capabilities. Its ability to understand speech, context, and intent makes it adaptable across various industries. Meanwhile, its in-house development expertise minimizes hosting costs, providing a competitive edge.
SoundHound’s growing AI ecosystem spans multiple industries, with particularly impressive progress in the restaurant business and electric vehicle space. The company has deployed its AI solutions in over 10,000 locations worldwide in the restaurant sector, partnering with major brands like Panda Express and White Castle. The electric vehicle (EV) and broader car industry also present significant opportunities as cars increasingly require advanced infotainment systems.
With a sizeable pipeline in the smart answering space for small and medium-sized businesses and expanding into healthcare, insurance, and banking, SoundHound AI has a lot of potential for disruption across multiple sectors. There will be many barriers to overcome, and there is competition; however, SoundHound is certainly in a strong position to disrupt.
SoundHound AI’s Perplexing Valuation
My bearish sentiment stems from SoundHound AI’s valuation, which is nothing short of astronomical, reflecting the market’s extreme optimism about its future potential. The company’s EV-to-Sales (TTM) ratio of 113.2x is a staggering 3,239.6% higher than the sector median of 3.4x. Similarly, its Price-to-sales (TTM) ratio of 95.0 eclipses the sector median by 2,839.5%.
While slightly lower, the forward-looking ratios still paint a picture of an extreme and likely unsustainable valuation. The forward EV-to-Sales ratio of 90.8x and forward Price-to-Sales of 91.9x are 2,753.3% and 2,773.7% above sector medians, respectively. This suggests that the company remains highly overvalued even with projected growth compared to its peers.
Meanwhile, SoundHound’s Price-to-Book (TTM) ratio of 26x is also illustrative of the company’s lofty valuation, significantly surpassing the sector median of 3.4x. Moreover, with a market cap of $7.7 billion against total debt of $43.8 million and cash of $135.6 million, the company’s valuation appears to be driven more by future expectations than current financials and cash positions.
While SoundHound AI’s innovative voice AI technology may justify some premium, these valuation metrics suggest an extremely speculative market sentiment. It might just be a case of overhyping an interesting player in the AI segment.
SoundHound and AI Hype
Building on that, I’m bearish because recent gains in SoundHound AI’s stock price may indeed be largely attributed to AI hype rather than fundamental value. Despite projected revenue growth, the company’s current valuation appears unsustainable. With a market cap of $8 billion against revenues of only $83 million this year and $160 million projected for next year, the P/S ratio remains astronomically high even with optimistic growth forecasts.
This valuation suggests the stock is priced beyond perfection, leaving little room for further upside without extraordinary performance. While short-term speculation can drive inflated valuations, investing in stocks with such extreme multiples rarely yields positive long-term returns.
Is SoundHound AI Stock a Buy According to Analysts
On TipRanks, SOUN is a Moderate Buy based on three Buys, two Holds, and zero Sell ratings assigned by analysts in the past three months. The average SOUN stock price target is $8.10, implying a 62.77% downside potential.
The Bottom Line on SoundHound AI
As highlighted, I’m bearish on SoundHound AI and suggest the vast premium to the share price target infers the same. While the company’s innovative voice AI technology and strategic positioning in multiple industries showcase its disruptive potential, its current valuation appears unsustainable. With all metrics far exceeding sector medians, SoundHound’s stock price seems driven more by AI hype than fundamental value.
Despite projected revenue growth, the $8 billion market cap against modest current and forecasted revenues raises concerns about overvaluation. Investors should approach SoundHound cautiously, recognizing the disconnect between its promising technology and its inflated market valuation.
I’d also add that investing in SoundHound AI stock is particularly risky due to a shift in broader market sentiment. With the pace of interest rate cuts slowing, there is less optimism, which could reduce appetite for high-growth stocks like SoundHound, potentially resulting in increased volatility and downward pressure on its valuation.
