SoundHound AI (NASDAQ: SOUN) is an unusual beast. The company is a solid artificial intelligence (AI) expert with fantastic business prospects over the long haul. The stock is a volatile plaything for get-rich-quick speculators on social media and Reddit (NYSE: RDDT) forums. So SoundHound AI's stock gained 78% between the end of October and the closing bell on December 2.
I love the company and expect it to soar for years to come -- but I would not recommend buying it at these extremely lofty prices.
Let me explain.
SoundHound AI's business prospects
This AI veteran's long-term future looks incredibly bright.
SoundHound AI has built an unparalleled voice recognition system after decades of AI-based audio analysis. The company serves a wide variety of sectors, from in-car voice controls to automated drive-through ordering systems and phone-based menus. Management estimates the addressable market to be worth more than $140 million of annual revenues, and SoundHound AI has many rivals but few technology equals.
The customer list includes household names like Chrysler/Dodge/Jeep parent Stellantis (NYSE: STLA), consumer electronics giant LG, and the Chipotle Mexican Grill (NYSE: CMG) restaurant empire. The roster grows quarter by quarter, making large strides when SoundHound AI acquires smaller AI software developers with firmly established customer relationships.
Quarterly revenues jumped from the $15 million range in recent quarters to more than $25 million in the third quarter of 2024. Management projects more than $150 million in 2025 sales, or nearly $38 million per quarter next year. That radical growth is supported by a massive and surging backlog of long-term contracts, amounting to $723 million in the second quarter and "in excess of $1 billion" three months later, including the agreements included in the recent buyout of enterprise software maker Amelia. The backlog will convert into cash-based revenues as the contracts are executed, with an average term of about six years per deal.
So SoundHound AI stands on solid ground, chasing some impressive long-term goals. The stock is popular for robust reasons.
The meme stock phenomenon
At the same time, SoundHound AI's stock price is artificially inflated by treasure-seeking meme stock enthusiasts.
Egged on by social media influencers on Reddit, X, and other channels, lots of small investors have been buying SoundHound AI stock at rapidly rising prices over the last month. The idea is to break the stock market system, forcing a large group of short-sellers to cover their pessimistic best and unleashing a furious share price surge. So-called short-squeeze events can be spectacular, and SoundHound AI was an easy target with limited daily trading volume and more than 20% of the shares involved in short-selling bets.
By timing this chart action just right, SoundHound AI's meme stock fans hope to convert their stock holdings into cash at just the right moment, before the short-squeeze spike fades out and the stock falls back to more reasonable prices.
Patience is key for SoundHound AI investors
The attempted short-squeeze push is running out of steam. SoundHound AI's trading volume remains high and the share price is way up, but the Reddit chatter has started to slow down and short-seller interest actually increased in November. The trading volume comes and goes.
One of these days, I expect this mini-bubble to pop. When it does, the vast majority of speculating SoundHound AI buyers will miss the opportunity to monetize their paper gains. Even with stop losses and other defensive tactics in place, the sudden drop will leave many shareholders deeply underwater. That's just the way sudden price spikes tend to work out in the real world.
I might be tempted to double down on my SoundHound AI investment after that sharp price correction. As I said, this is a fine company with stellar long-term growth prospects, and I will almost certainly buy more of it when the price is right.
But the price is nowhere near "right" at the moment, unless the stock dropped before this modest article worked its way through the publishing process. I highly recommend holding on to the SoundHound AI shares you already own while preparing to pounce on a lower-priced version of the same great stock. Time in the market beats timing the market, especially when the complex interplay of meme stock investors and short-sellers dictates the price action.
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*Stock Advisor returns as of December 2, 2024
Anders Bylund has positions in SoundHound AI. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. 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.
