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

SoundHound AI — the Santa Clara, Calif.- 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.

Despite the positives — such as Nvidia’s purchase of 1.73 million SoundHound shares (0.6% of its shares outstanding), according to February 14 Nvidia 13F filing — 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:

• 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.”

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 loss “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 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 SeekingAlpha.

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 Assistant, SeekingAlpha wrote. Moreover, it appears unlikely that SoundHound has a competitive advantage over these larger rivals in Voice AI.

High Cash Burn Rate

SoundHound boasts of a solid cash position. Mohajer said the company nearly doubled its cash position 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 is 2021 IPO, SoundHound burned though $148 million in cash in 2022 and 2023. To remain solvent, the company 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 March 2022, SoundHound’s previous auditor, UHY LLP, gave “an unqualified opinion expressing doubt that the company can continue as a going concern,” in SoundHound’s Q4 2021 report 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.

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

Dan Ives from Wedbush, who backed his optimistic view after earnings. Specifically, Ives is a fan of SoundHound AI’s innovative tech and strategic partnerships, and he thinks their voice recognition and natural language processing skills will be in high demand as more industries start using AI-powered solutions. Ives calls SOUN a “Buy,” and has the Street-high price target of $9, 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 20 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, he unloaded 108,000 shares of SoundHound stock and dumped another 550,000 shares on February 26, SeekingAlpha 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 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 research firm Navellier, which expects the company’s “bubble to burst after surging over 400% since early February,” wrote Investing.com.