Some short-term market pain can set you up for long-term gain. That's what's going on with SoundHound AI (NASDAQ: SOUN) right now.
Wall Street is backing away from pricey Nasdaq Composite stocks due to economic uncertainty (the index is down nearly 14% from its all-time high as of this writing), and SoundHound AI's stock is trading down more than 22% so far in March. Opportunistic investors should be able to make a mint in the long run by picking up this promising tech stock, now trading at a more reasonable price.
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The secret to SoundHound AI's success
I've been a SoundHound AI fan for years. The company was an artificial intelligence (AI) innovator long before it was cool. Its eponymous song-identification application has been around since 2006 -- years before the first modern smartphone hit store shelves. The app generated an unrivaled store of audio data and user satisfaction scores, adding up to an AI-driven audio interpretation system.
So I was excited to see SoundHound AI enter the public stock market in a push to expand its business horizon. The lessons learned from song-ID operations evolved into a general-purpose voice assistant. SoundHound AI has found valuable ways to use this AI tool in business operations, from drive-thru ordering windows and phone-based menu systems to in-car infotainment controls.
Management sees SoundHound AI as a market leader with business value for advertisers, e-commerce merchants, app developers, and technology product creators. The company is ripping pages from the money-making playbooks of Alphabet, Amazon, Apple, and Microsoft, respectively. That's an impressive bunch of role models.
Of course, it's a bit early to compare SoundHound AI's business prospects to a perfect combination of those four "Magnificent Seven" names. I see this comparison as an ambitious long-term goal, not a promise of immediate success. But I'm convinced that SoundHound AI stands at the very beginning of a lucrative growth story. It may not be a trillion-dollar stock in the making, but it's starting to look modestly valued in the tariff-spooked Nasdaq market sell-off.
Wild price swings, sometimes for silly reasons
In spite of SoundHound AI's fantastic business prospects, the stock soared for all the wrong reasons in 2024. First, investors saw far too much value when AI giant Nvidia made a small investment in SoundHound AI's stock. Nvidia has now closed that position after starting a couple of promising collaborations with the smaller AI company.
SoundHound AI also became a meme stock last fall. The lingering price boost from the Nvidia investment inspired a lot of short-selling of SoundHound AI stock, which then led to social media channels attempting to kick off a price-boosting short squeeze. That effort resulted in a price peak of $24.23 per share around the holidays, followed by a retreat and lower trading volumes in 2025.
The ratio of short-seller interest to SoundHound AI's market float dipped briefly, but is now back up to even higher levels:
Data by YCharts.
SoundHound AI's valuation finally makes sense again
It's fair to say that the meme-stock era is over for SoundHound AI investors. The stock price is down in single-digit territory again, which is above the peaks of the Nvidia-based surge, but with the assistance of another year's business development.
I took some profits on my SoundHound AI position in early December, but now I'm a buyer of this stock again. It still looks quite expensive by traditional valuation metrics, with negative profits of every kind and a price-to-sales ratio of 40.6. But that's down from 110.5 in late December, and the P/S ratio doesn't account for SoundHound AI's large backlog of unfilled orders.
The company won't convert its $1.2 billion backlog into revenue in one fell swoop, since it's based on a growing collection of multiyear contracts. Let's assume a four-year average conversion period and a complete stop to SoundHound AI's backlog growth. Under these conservative assumptions, the stock is trading at roughly 11 times annual contract values. And don't forget that actual revenue more than doubled in last month's fourth-quarter report -- SoundHound AI is following through on its sales-growth promises.
So I couldn't recommend SoundHound AI's stock with a straight face for most of 2024, but things are different now. The business is growing as expected, the long-term market opportunity is still massive, and the stock is starting to look affordable in the recent Nasdaq sell-off.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, Nvidia, and SoundHound AI. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends Nasdaq and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
