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This post contrasts the dire warning that SoundHound AI (SOUN) is a “pump & dump” stock with a wait-and-see position depending on the effects of Nvidia's February 14th $3.7M investment.

About SoundHound AI

SoundHound AI is a voice AI and sound recognition company based in Santa Clara, California, that provides AI-powered voice technology for cars, TVs, smart home appliances, and restaurants.

The Pump-and-Dump Scenario

Louis Navellier, in an article for investorplace.com, believes the YTD surge of 294% in SoundHound AI (as referenced in my article here) doesn’t have the superior fundamentals needed to maintain its momentum and if SoundHound AI's performance is any indication - DOWN 28% last week and DOWN 13% so far in March (see here) - he is correct.

Navellier cites Forbes who identify six factors that point to the stock rising too far, too fast, namely:

1. A disappointing fourth-quarter financial report (see here),
2. Intense competition suggesting big players could catch up to its leadership in voice AI technology,
3. A high cash burn rate,
4. Dodgy financial statements,
5. Excessive valuation, and
6. a spike in bearish bets against the company

In addressing some of those points Navellier reports that SoundHound AI:

• posted a 16.7% earning miss in the fourth quarter, 
• has a market capitalization of $1.8 billion but only has an annual forecasted 2024 revenue of $69.5 million or 25.9 times the forecasted 2024 revenue,
• has three customers that account for 62% of its revenue making the loss of any of these problematic.
• only has $95 million of cash on the balance sheet,
• has frequently been mentioned on WallStreetBets, a hotbed of aggressive trading where investors often collude with one another to pump up the share price of a stock, suggesting in his view that, as such, SoundHound AI stock is a “pump & dump” stock.
  • According to investopedia pump-and-dump is: a manipulative scheme that attempts to boost the price of a stock ( usually targeting a micro- and small-cap stock)...based on false, misleading, or greatly exaggerated statements. The perpetrators of a pump-and-dump scheme already have an established position in the company's stock and will sell their positions after the hype has led to a higher share price.
  • (The insider transaction history for SoundHound AI (see here) shows a total of 49 insider sells and no insider buys over the past year. This trend suggests that insiders may perceive the stock as fully valued or are taking profits off the table.
    • COO Michael Zagorsek sold 24,105 Shares on March 19th at an average price of $8.37 per share while
    • Keyvan Mohajer, CEO, sold 31,665 shares of the company on March 22, 2024 at an average price of $6.08 per share.
    • The stock price had peaked at $8.91 on March 15th and was trading at $5.96 at mid-day today.)
• and concludes his evaluation by stating that the company doesn't have the fundamentals to back up its growth which will eventually catch up to its stock.

Analysts at Cantor Fitzgerald have also soured on SoundHound AI, issuing a rare double downgrade to "underweight" (sell) from "overweight" (buy) while simultaneously slashing their price target to $4.90. Source

The Wait-and-See Scenario

Keithen Drury of The Motley Fool, notes (see here) that:

• Nvidia's recent investment in SoundHound AI suggests that the company likely has more information than the average person on SoundHound AI's prowess but, while the investment is still a vote of confidence in the company's ability to grow in the shadow of its larger competitors, which investors should note, Nvidia's decision to make such a small investment in SoundHound AI, instead of taking a bigger stake or buying it outright, suggests Nvidia may well have some qualms about doing so.
• That being said, however, the company reports a massive backlog of orders worth $661 million in the pipeline for deals already signed and if it delivers on these deals, it will produce impressive growth, which is likely why Nvidia is investing in it.

SoundHound AI's stock is incredibly expensive at around 26 times forward sales (source) in comparison to the sector mean of less than 3 times forward sales but, as Drury correctly points out, if the company can grow its revenue from $17 million per quarter to $100 million per quarter in a few years, today's stock price may not be a bad deal but that it all depends on future execution, which is impossible to judge right now.

Drury concludes that, while SoundHound AI has a great product and a lot of momentum that is already priced into the stock and, as a result, he would wait until the pandemonium caused by Nvidia's $3.7M investment (accounting for about 0.7% of SoundHound AI's outstanding shares) dies down a bit before taking a position in the company.

Conclusion

• Owning some stock in SoundHound AI might be a promising speculative play for long-term investors, but its high valuation, high leverage, and persistent losses could limit its near-term gains.
• As such, investors might want to follow Nvidia's lead and nibble on the stock, but they shouldn't assume the chipmaker's investment will set a firm floor under its volatile price.
• If they already own some stock, but don't have a stomach for risk and volatility, they might be better off selling their stock.

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