SoundHound AI stock (NASDAQ:SOUN) has a rapidly growing business, promising technology, an impressive list of customers, and an investment from Nvidia (NASDAQ:NVDA). Moreover, SOUN’s partnership with Nvidia could eventually generate a great deal of revenue for the smaller firm, tremendously lifting Soundhound AI stock in the process.
On the other hand, however, SoundHound’s valuation remains extremely high, and there are signs that investors have bec9ome cautious about the name as a result of this situation. Moreover, a research firm which is selling SoundHound AI stock short made several disturbing, ominous allegations about the firm last month.
Given these negative qualities, I recommend that investors sell SOUN stock at this point.
Promising Technology, Top-Notch Partnerships and a Potential Alliance With Nvidia
As I noted in a previous column, SOUN’s technology “‘translates spoken inputs directly into conversational AI,’ according to Seeking Alpha columnist Gary Alexander.” On the other hand, competing products alter “speech to text, then translate that text into meaning,” Alexander explained. SOUN’s method is likely meaningfully faster and more accurate.
Moreover, the firm has multiple, huge customers, including “including Oracle (NYSE: ORCL ), Square (NYSE: SQ ), Hyundai , and Stellantis’ (NYSE: STLA ) Jeep unit.”
Also noteworthy is that Nvidia has acquired 1.7 million shares of SOUN stock, and the firms are partnering on “an innovative, generative-AI-enabled in-vehicle voice platform,” another InvestorPlace columnist David Moadel, reported on April 1.
It’s certainly possible that the two companies, working together, could improve SoundHound’s technology and convince many more companies to adopt SOUN’s offering. I wouldn’t even be shocked if Nvidia acquires SOUN at some point down the road.
SOUN’s Huge Valuation and Disturbing Allegations
SoundHound’s enterprise value/revenue ratio is a stratospheric 37.66 times. Indicating that the Street is somewhat wary of that huge valuation, investment bank Northland Capital on Feb. 28 cut its rating on SOUN to “market perform” from “outperform.” Of course, the bank cited valuation as the main reason for the downgrade.
Moreover, the shares tumbled from their intraday peak of $8.80 on March 15 to $5.45 in pre-market trading on April 2.
Likely contributing to the Street’s recent lack of enthusiasm for the name was a March 19 report on the company issued by Capybara Research. In the past, I have found that detailed reports on companies issued by short sellers tend to have at least some valid allegations.
Capybara alleges that “Multiple large customers have paid SoundHound to cancel their contracts,” while the firm has a ” istory of losing large contracts.” According to the short seller, Netflix (NASDAQ:NFLX), Deutsche Telekom, and Mercedes-Benz have all canceled their deals with SoundHound.
Further, the firm reported that SOUN’s “speech recognition tech is a commodity service that competes with comparable products from” offered by many other firms, including Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL). Finally, the firm reports that SoundHound has been losing customers to Cerence, its “largest competitor in the automotive space.”
If these assertions are true or even mostly accurate, it’s reasonable to conclude that SoundHound’s offering is not very unique, that a significant number of its customers have not been pleased with its offering, and that the firm is losing market share.
The Bottom Line on SOUN Stock
SoundHound’s valuation is huge, while there’s a good possibility that the company has indeed been shedding major customer and losing market share. As a result of these deveopments, the Street’s fascination with the company appears to have disappeared.
While I continue to believe that SOUN has a great deal of potential, due to its high valuation, the Street’s caution towards the name, and the short seller’s allegations, I view its risk-reward ratio as quite negative.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines