Nvidia Dumps SoundHound AI Stock: Should You Do the Same?

Last year, SoundHound AI (SOUN -3.76%) gained significant attention in the stock market after Nvidia announced it owned over 1.7 million shares of the innovative tech company. This revelation sparked interest among investors, who eagerly purchased shares of SoundHound, hoping it would become a leading player in the growing artificial intelligence (AI) sector.

However, news broke in February that Nvidia had sold its holdings in SoundHound. Since then, numerous investors have followed suit and increased their selling. Now, the stock price has fallen below $10, reflecting a decline of more than 50% since the beginning of the year.

This situation raises an important question: Should you also sell your shares of this AI company, or could this downturn present a buying opportunity?

The Growth Potential and Profitability Challenges

SoundHound AI has considerable potential, particularly with its voice AI platform that enhances operational efficiency, especially in drive-thru restaurants and automotive applications. The challenge, however, is that the company is currently not profitable. Despite experiencing robust revenue growth fueled by strategic acquisitions, such as Amelia and SYNQ3, the company has struggled with expenses.

One concerning trend is the persistent pattern of operating losses exceeding revenues. Such a situation isn't sustainable, especially as the company continues to expand. These circumstances could lead to further declines in its stock value.

Additionally, the company is facing cash flow issues. In January, it announced plans to potentially raise up to $500 million through a mixed shelf offering. If SoundHound cannot significantly improve its financial performance, the likelihood of needing additional funding becomes probable, potentially further diluting existing shareholders' stakes. The growing competition in the AI landscape may compel SoundHound to invest heavily to maintain its market position, amplifying the need for future capital raises.

Valuation Concerns

Even with the recent drop in its stock price, SoundHound remains relatively expensive for prospective investors. Currently, it trades at a price-to-sales (P/S) ratio of 43 and has a price-to-book ratio exceeding 12. Investors diving into the stock at this juncture are paying a premium for a company that has yet to showcase a clear path to profitability.

While the recent acquisitions might help boost revenue and could eventually lower the P/S ratio, without strong indications of future profitability, its $3.5 billion market valuation may seem too high for many investors.

Is SoundHound AI Stock Worth the Gamble?

Many retail investors had high hopes for SoundHound becoming a major player in the AI market, yet those expectations appear to wane, especially after Nvidia's decision to divest its stake. Although the stock has seen a 42% rise in the last year, investor sentiment seems to be changing in light of current developments.

While a rebound for SoundHound is not entirely out of the question, it appears increasingly unlikely unless the company can significantly improve its financial situation. It was considered a high-risk stock during its peak popularity last year, and the situation remains largely unchanged. Unless you're prepared to take on substantial risk, you might find safer growth stocks more appealing than SoundHound at this moment.

Nvidia, SoundHound, Stocks