This year has been a non-stop thrill for us SoundHound AI (NASDAQ:SOUN) investors. After starting 2024 with a 23% loss through February 5, the artificial intelligence (AI) and speech recognition specialist reversed course and posted a 323% gain through March 15. It then turned lower and lost half of its value at market close on Wednesday. After such a whiplash outburst, the stock is still up 112% year-to-date.
A Wall Street analyst sees the decline as positive.
Lower risk, but still risky
Cantor Fitzgerald analyst Brett Knoblauch upgraded SoundHound AI stock to Neutral (Hold) from Underweight (Sell) while maintaining her $4.90 price target. This corresponds to an increase of around 10% compared to the closing price of the share on Wednesday.
The analyst had previously downgraded SoundHound AI twice, primarily due to the company’s lofty valuation of 40 times sales. However, the analyst also cited a number of other concerns that suggest SoundHound AI is a risky stock. The valuation has now fallen from 45x sales to 22x sales, with Knoblauch suggesting that downside risk and upside potential are now equal.
I still believe investors should exercise caution. The same risks that the analyst originally highlighted remain, including the opaque operating model, inadequate capital spending and potential customer losses.
There are other problems. In its 2023 annual report, SoundHound AI admitted that it had identified “material weaknesses in its internal control over financial reporting,” leading the company to adjust a number of its financial reports. This is a serious warning sign that may attract the attention of regulators.
I have also raised concerns in the past about how SoundHound accounts for its backlog. Now that management has “updated” this metric, the backlog now includes “binding customer contracts” and “recoverable potential revenue,” which are highly dependent on management’s assumptions.
Even after a significant decline, SoundHound AI is selling for 22 times sales but still hasn’t turned a profit. Investors should exercise caution with this volatile high-flyer.
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Danny Vena 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.
According to a Wall Street analyst, SoundHound AI stock still has room for improvement after its crash. Is the stock a buy after a 50% decline? was originally published by The Motley Fool