The artificial intelligence sector has been a significant driver of stock market growth, with Nvidia emerging as a standout performer, achieving an 837% return over two years. However, another AI company, SoundHound AI, has surpassed Nvidia’s growth rate, experiencing a staggering 1,030% increase in its stock value in 2024. This remarkable surge, which saw its stock climb from $1.62 per share in February to nearly $24 today, has drawn attention to the company’s trajectory and the factors behind its stock performance.
What underpins SoundHound AI’s rapid rise?
SoundHound AI, originally recognized for its music identification app, has since diversified its AI technology into various industries. Its speech recognition solutions have been integrated into products by major companies like Netflix (NASDAQ:NFLX), Stellantis, and SiriusXM’s Pandora. The company’s revenue for the third quarter grew by 89% year-over-year, reaching $25.1 million. Moreover, SoundHound has reduced its reliance on its largest customer, which now accounts for only 12% of its revenue compared to 72% last year. However, despite these achievements, its financials remain strained as operating losses doubled from the previous year, and the company has struggled to achieve profitability even after 20 years in operation.
Is this growth sustainable, or just a short squeeze?
SoundHound’s stock surge is not solely tied to its operational performance. Market analysts suggest that its recent rise is largely driven by a short squeeze, with over 23.5% of its float sold short. This speculative activity has inflated the stock price, leading to concerns about potential volatility. Analysts project a price correction, forecasting the stock could lose half its value in the coming year. Though SoundHound has significant market potential, competition from AI giants like Microsoft (NASDAQ:MSFT)-backed OpenAI adds pressure on its prospects for sustained growth.
SoundHound’s growth trajectory contrasts with its historical performance. Despite its long-standing presence in the market, the company has continuously reported widening losses as revenues grow. Its inability to turn increased sales into profitability has raised questions about its business model. Comparatively, Nvidia and other AI leaders, despite intense competition, have demonstrated stronger financial strategies and industry leadership.
The global voice and speech recognition market is projected to grow at a compound annual rate of 14.6% until 2030, driven by applications in healthcare, finance, and other industries. SoundHound’s technology positions it to potentially tap into this expanding market. However, with its financial struggles and strong competitors like OpenAI, SoundHound faces challenges in gaining substantial market share.
SoundHound’s stock performance underscores a disconnect between market speculation and operational fundamentals. While some investors view it as a high-potential stock, its financial difficulties and reliance on speculative trading activities make it a risky investment. Analysts suggest the company’s valuation, currently inflated by market dynamics, could make it a potential acquisition target, but at reduced valuations.
SoundHound AI’s impressive stock performance in 2024 highlights the volatile nature of AI investments. While its technology has real-world applications, the company’s inability to achieve consistent profitability remains a fundamental concern. For investors, the stock presents both opportunities and risks, with future performance contingent on the company addressing its operational inefficiencies and navigating competitive pressures effectively.
