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Stocks that are part of the artificial intelligence (AI) space, led by Nvidia (NVDA), have been on an absolute tear in the last 15 months. While Nvidia continues to stun analysts and investors due to its stellar growth and widening profit margins, there are several other stocks driven by AI optimism that trade at lofty valuations.
One such tech stock is SoundHound AI (SOUN), which is up 68% in the last year - and more than 136% in 2024 alone.
Let’s see why at least one Wall Street analyst thinks SoundHound AI stock is overvalued right now.
An Overview of Soundhound AI
Valued at $1.64 billion by market cap, SoundHound AI operates in the conversational intelligence space, providing voice AI solutions to businesses. The voice AI is built on proprietary technology, and is available in multiple languages to product creators across verticals such as automotive, TV, and IoT (internet of things).
Soundhound aims to serve consumer-facing industries on the back of AI-powered products like smart answering, smart ordering, and dynamic drive-thru, a multimodal food ordering solution.
SoundHound Stock May Underperform Going Forward
Despite its small size, SoundHound AI has a notable client list that includes Netflix (NFLX) and Mastercard (MA). Further, Nvidia has also invested in SoundHound, although it holds a stake of less than 1% in the company.
Alternatively, SoundHound AI does not enjoy any competitive moats, and may soon lose market share to big tech giants such as Apple (AAPL), Amazon (AMZN), Alphabet (GOOG) (GOOGL), and Microsoft (MSFT), all of which are developing their own voice recognition software.
Similar to other growth companies, SoundHound AI is unprofitable, and ended Q1 with $226 million in cash. While it grew sales by 73% to $11.59 million in Q1, its operating losses totaled $28.52 million, 13% higher than its prior-year loss of $25.2 million.
Analysts expect SoundHound AI to narrow its losses per share to $0.22 in 2025, compared to $0.40 per share in 2023. Given its current cash burn rate, SoundHound AI can maintain losses for six more quarters before it needs to raise additional capital, which would dilute shareholder wealth.
So, it seems inevitable that SoundHound AI will raise equity capital in the next 12 months. The company went public two years ago with 200 million outstanding shares, which has surged to almost 330 million today.
KM Capital Is Bearish on SOUN Stock
KM Capital is one investment firm that’s bearish on SOUN stock. According to KM Capital, SoundHound AI is overvalued at its current levels, as it trades at a lofty forward price-to-sales multiple of 23x. In fact, KM Capital argues that the tech stock’s fair price is $1.20, about 76% lower than Friday's close.
In an investor note, KM Capital stated, “I do not deny that SoundHound pioneers in a promising industry, and its Q1 earnings release was quite strong with the management’s optimistic outlook for 2024 and 2025. However, even my extremely optimistic discounted cash flow model showed that the stock is overvalued by several times.”
Alternatively, KM warns that if a tech giant makes an acquisition bid for SoundHound AI, share prices might increase in the near term.
This bearish view isn't exactly the norm for SOUN on Wall Street. Out of the six analysts tracking SOUN stock, four recommend “strong buy,” and two recommend “hold,” for a consensus rating of “moderate buy.”
The mean target price for SoundHound AI stock is $7.17, suggesting the stock could rally 41.6% from here.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
