SoundHound AI (NASDAQ:SOUN) creates voice artificial intelligence (AI) solutions that enables businesses across various sectors to develop AI-driven conversational experiences for their customers. Due to the AI craze that’s caught the market by storm, SOUN shares have more than doubled in 2024, but the party could be over. A short seller report, a lack of profitability and weighty valuation could make things worse for SOUN shareholders. For those looking to invest now, here are 3 reasons to exercise some serious caution.
Short Seller Report: SOUN’s AI product is not unique
Once generative AI came to the mainstream in 2023, the company launched SoundHound Chat AI, which integrates with knowledge domains. It pulls real-time data like weather, sports, stocks, flight status and restaurants create an AI-powered voice assistant experience. Moreover, when Nvidia (NASDAQ:NVDA) revealed it had a stake in the company, AI investors quickly added SOUN shares to their portfolio.
However, a pretty damning report from short seller Capybara Research has underscored why they may have made a mistake. Like all short seller reports, not every single allegation is necessarily 100% true, but many are grounded in thorough research and should be taken seriously. Capybara Research claimed “The Houndify product uses commodity speech recognition to search a manually programmed knowledge graph.” This basically means the algorithms undergirding the Houndify platform are nothing special and could easily be replicated by other companies.
Moreover, the report says SoundHound’s product is not fundamentally different from speech-recognition products already rolled out by tech giants including Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Google.
No real pathway to profitability
SoundHound’s year-over-year revenue growth has already started to stall since the macroeconomic environment became pretty unstable. According to Koyfin, SoundHound delivered solid double-digit revenue growth in 2023 but this was below that of prior years.
As the short seller report highlighted, SoundHound has lost some major customers that the company admitted were crucial to the business. These customers include Mercedes-Benz (OTCMKTS:MBGYY), Netflix (NASDAQ:NFLX) and Deutsche Telekom (OTCMKTS:DTEGY). The loss of top customers coupled with the company’s product not being so unique, could make profitability difficult for SoundHound.
Valuation has become pretty rich
The rally that catapulted U.S. equities to frothier valuations in first quarter ended abruptly in the second quarter. The Nasdaq and S&P 500 posted their worst losses at the end of April with the former falling 2.4% while the latter fell 2.6%. Still, U.S.-listed stocks overall remain expensive and at risk of more volatility as a result.
This gets us to a stock like SoundHound AI. The company has seen its share price more than double since the start of the year. The company is trading at 23x forward sales, which is quite high for a sales multiple. Of course, because the company is not yet profitable, so the EBITDA and price-to-earnings multiples are out of whack already.
Fears of higher for longer interest rates will continue playing a major role in market volatility. That potentially jeopardizes current SOUN shareholders.
On the date of publication, Tyrik Torres 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.