Why SoundHound AI’s 346% Stock Price Pop Is Too Much

SoundHound AI — the Santa Clara, California- based provider of AI-powered voice technology for cars, TVs, and restaurants — has delivered a 346% return to holders of its shares since the beginning of 2024.

That growth has been supported by developments such as Nvidia’s purchase of 1.73 million SoundHound shares (0.6% of its shares outstanding), according to a February 14 Nvidia 13F filing. Despite these kinds of positives, there are plenty of reasons to bet the company’s stock — which topped Yahoo! Finance’s most active list on March 15 — has risen too far too fast.

Here are six of them:

• Disappointing fourth quarter financial report.
• Intense competition.
• High cash burn rate.
• Dodgy financial statements.
• Excessive valuation.
• Spike in bearish bets against the company.

SoundHound is thrilled with its performance and prospects. “We are very proud of the growth,” CEO Keyvan Mohajer told Barron’s. “Eighty percent is really good. It was a record quarter for revenue, and we’re really proud of that.”

Alluding to fresh revenue from a “pre-eminent AI chip company” — which Mohajer declined to identify — he sees a bright future for the company. “The real message is that we’re just getting started. Demand is more than we expected. And we are very fortunate to be in this position.”

SoundHound’s Disappointing Fourth Quarter Financial Report

On February 29, SoundHound reported revenue that fell short of expectations and a larger than expected loss while forecasting revenue consistent with the Wall Street consensus.

Here are the key numbers:

• Q4 2023 revenue: $17.1 million — up 80% from the year before and $600,000 short of analysts' projection, according to Dow Jones Newswires.
• Q4 2023 loss per share: 7 cents — 8 cents a share below Q4 2022’s loss and a penny per share worse than the FactSet consensus, noted Dow Jones Newswires.
• Q4 2023 adjusted EBITDA loss: $3.7 million — far above the FactSet consensus estimate of “less than $1 million,” reported MarketWatch.
• 2024 revenue forecast: a range between $63 million to $77 million — matching the consensus view at the midpoint, reported MarketWatch.
• 2025 revenue forecast: $100 million — meeting the FactSet consensus, according to MarketWatch.

Intense Competition From Larger Rivals

Soundhound offers a solid set of voice and audio AI features. Yet the company faces fierce competition.

SoundHound’s product features include:

• Automatic speech recognition;
• Text-to-speech;
• A mobile app that identifies songs “after hearing a few bars;”
• Real-time lyrics;
• Voice-activated music search; and
• Houndify, the virtual voice assistant, according to Investing.com.

Large technology companies with far greater resources — such as Amazon AMZN , Apple, and Google — could replicate or improve SoundHound’s “functionality with Alexa, Siri, Google Assistant,” noted Seeking Alpha.

How so? Amazon CEO Andy Jassy said the company is adding a large language model to Alexa and Google’s CEO Sundar Pichai indicated the company will use generative AI to power its Assistant tool. Moreover, it appears unlikely that SoundHound has a competitive advantage over these larger rivals in Voice AI, Seeking Alpha wrote.

High Cash Burn Rate

SoundHound boasts of a solid cash position. Mohajer said the company nearly doubled its amount from about $109 million at the end of 2023 to more than $200 million due to actions the company took in early 2024, Barron’s reported.

After raising $140 million in its 2021 IPO, SoundHound burned though $148 million in cash in 2022 and 2023. To remain solvent, the company has issued $98 million in stock since 2022 — thus diluting shareholders, SeekingAlpha wrote.

Dodgy Financial Statements

SoundHound’s financial statements could be in better shape.

The company switched auditors in 2023 — from UHY to PwC. In SoundHound’s Q4 2021 report — which was issued in March 2022 — SoundHound’s previous auditor, UHY LLP, expressed “doubt that the company can continue as a going concern,” noted S&P Capital IQ.

SoundHound’s new auditor, PwC, had problems with the company’s internal controls. “In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023,” wrote PwC in SoundHound AI’s 2023 10K.

Excessive Valuation

Two analysts see the company’s stock as overvalued. Bill Smead of Smead Capital Management expressed strong feelings about a “disconnect from the traditional financial modeling” that the company had a $1.8 billion stock market capitalization while generating a mere $17 million in Q4 2023 revenue, according Yahoo! Finance.

Seeking Alpha estimated SoundHound is worth $1.20 a share. This estimate assumed revenue growth would slow from 50% to 20% and the company would continue to finance its cash burning operations by issuing stock.

Wedbush analyst Dan Ives set a $9 a share price target for SoundHound. He argued the company’s “voice recognition and natural language processing skills will be in high demand as more industries start using AI-powered solutions,” noted Barchart.

Spike In Bearish Bets Against The Company

Short interest in SoundHound shares has soared recently. Specifically, the number of shares sold short increased 43% in the month ending February 29 to 18.4% of float, according to the Wall Street Journal.

Between February 15 — the day SoundHound stock rose 66% after Nvidia announced it owned shares of the company — and February 29 when the company reported its disappointing fourth quarter results (after which the stock fell 18.6%), Mohajer sold hundreds of thousands of shares in the company.

How so? On February 15, Mohajer unloaded 108,000 shares of SoundHound stock and dumped another 550,000 shares on February 26, Seeking Alpha noted. On March 12, he sold another 379 shares, according to a Form 4 filing — leaving him with about 14.1 million shares.

If Mohajer is so excited about his company’s future, why is he selling SoundHound’s shares?

Soundhound AI trades at 39.5 times the company’s 2024 revenue forecast of $70 million. “This AI stock is obviously a ‘pump and dump’ stock,” argues investment management firm Navellier, which expects the company’s “bubble to burst after surging over 400% since early February,” wrote Investing.com.