The March inflation report was surprisingly hot.
Shares of SoundHound AI (SOUN -7.01%) were pulling back today in line with the broader market sell-off on a hotter-than-expected inflation reading. The high inflation report makes it less likely that the Federal Reserve will lower interest rates later this year, and high-priced, unprofitable, growth stocks are generally more sensitive to interest rates and inflation than the rest of the stock market.
Considering SoundHound’s dramatic surge this year, this may be doubly true for the AI stock. As a result, the company’s stock was down 7.1% as of 1:25 p.m. ET.
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A new SoundHound risk gets exposed
The Bureau of Labor Statistics reported this morning that the Consumer Price Index (CPI) in March rose 0.4% from February and was up 3.5% from a year ago. Those numbers were above consensus forecasts of 0.3% monthly growth and 3.4% annual growth.
Core inflation, which excludes food and gas prices, rose 0.4% from February and 3.8% from a year ago. Both numbers were above estimates, as well.
The news sent stocks falling broadly as investors believed it would lead to the Federal Reserve lowering its number of planned interest-rate cuts. Lower rates tend to favor growth stocks like SoundHound AI, as those stocks are valued based on earnings in the distant future, according to the discounted cash flow model. When interest rates are low, those earnings are worth more than when rates are high.
What’s next for SoundHound AI?
It’s easy to see why SoundHound would be sensitive to macroeconomic conditions. The company still had minimal revenue of just $17.1 million in its most recent quarter. Though it’s growing fast, with revenue up 80% in the fourth quarter, much of that new revenue comes from companies experimenting with its voice activation technology, and its customers are less likely to embrace new technologies or spend on new products when times are tough.
While the economy currently looks stable, high inflation and interest rates could cool off, putting pressure on stocks like SoundHound AI, which is small, unprofitable, and expensive at a trailing price-to-sales ratio of 24.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
