On the heels of an explosive rally, SoundHound AI (SOUN -18.67%) stock is seeing a big pullback. The audio-tech company reported its fourth-quarter earnings results after the market closed Thursday and posted sales and earnings that fell short of expectations for the period.
SoundHound recorded a loss per share of $0.07 on revenue of $17.15 million in Q4. Meanwhile, the average analyst estimate had called for the business to post a per-share loss of $0.06 on revenue of roughly $17.21 million. by the weekend, the company’s stock had plummeted nearly 19% in the daily trading session.
With the stock rapidly losing ground, is it too late to invest in SoundHound AI? Or is the recent valuation decline a buying opportunity?
Was SoundHound AI’s Q4 report a complete dud?
SoundHound’s revenue grew 80.5% year over year in Q4. Meanwhile, the company posted a gross margin of 77% in the period, up from 71% in the prior-year period. Thanks to improving margins, the business’s loss of $0.07 came in significantly below the per-share loss of $0.15 it posted in the prior-year period.
SoundHound’s Q4 sales performance brought full-year revenue to $45.9 million, up 47% annually. The company’s growth accelerated significantly in the year’s second half, but there are some caveats here. SoundHound’s revenue base is still relatively small, and the timeline for future customer additions and deal expansions is difficult to predict.
SoundHound’s Q4 results weren’t bad by any stretch of the imagination, but the company’s valuation had been pushed up by excitement surrounding AI opportunities. Prior to the recent earnings release, the stock had been priced for perfection — and it’s not surprising to see a significant pullback for SoundHound’s share price, even though sales are expanding at a rapid clip.
Will SoundHound AI stock bounce back?
In addition to the company’s Q4 sales and earnings falling short of Wall Street’s targets, investors may have hoped the company would reveal game-changing technologies and deals. Nvidia‘s recent disclosure that it owned a small stake in the company helped send SoundHound stock soaring, and subsequent comments from CEO Keyvan Mohajer helped foster the idea that big things were in the works and could be announced imminently.
Adding to the fervor surrounding the stock, the annual Mobile World Congress expo took place this week. Announcements about next-generation telecommunications and AI technologies helped increase excitement for advancements that could open up new opportunities for SoundHound.
While SoundHound AI did announce new deals with Church’s Chicken and an unnamed hamburger chain, the company’s earnings report and conference call did not arrive with the kinds of earthshaking announcements that some investors hoped for.
But despite the big pullback for SoundHound AI stock today, the company’s share price is still up roughly 183% in 2024. While many factors have shaped recent performance for the stock, I think the bullish case for the stock is well summarized by a recent statement from Mohajer during the company’s Q4 conference call:
At SoundHound, we’ve made two important predictions for the future of AI. The first is that AI customer service will be as necessary for every business as WiFi and electricity. Second is that speaking will become the primary way we interact with the devices around us.
In broad terms, Mohajer is likely right about the increasing demand for AI-powered customer service and the rise of voice-based interfaces. These trends should help spur continued sales growth for the company.
Notably, SoundHound says its cumulative subscriptions and bookings backlog had doubled to reach $661 million at the end of the fourth quarter. But assuming the business had a backlog of roughly $330 million at the end of the prior-year period, the relatively slow rate at which orders were converted into sales over the last year stands out.
Much of the unrealized revenue likely stems from the nature of production scaling in the automotive space. For example, SoundHound’s Q4 report notes signing a contract with a large auto original equipment manufacturer (OEM) to “extend and increase unit volumes through 2037” as a major business development that occurred in 2023. The conversion of backlogged orders to sales suggests the company’s revenue growth could actually accelerate dramatically, but it’s difficult to map SoundHound’s future sales and earnings trajectory right now.
Following today’s pullback, SoundHound is still valued at roughly 22 times this year’s expected revenue.
SOUN PS Ratio (Forward) data by YCharts. PS Ratio = price-to-sales ratio.
While it’s possible that SoundHound’s incredible rally could resume and its share price could soar above current levels, the company remains a speculative bet despite the recent valuation pullback. Given the stock’s highly growth-dependent valuation and uncertain outlook, investors should understand that the stock is a high-risk, high-reward play, even with AI tailwinds at its back.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
