SoundHound AI has more than doubled quickly for three consecutive years. The gains aren't sticking.
Investing can sometimes be about recognizing patterns, and there aren't too many situations as glaringly obvious as SoundHound AI (SOUN 15.46%). Shares of the conversational intelligence specialist have gotten off to blazing-hot starts in its first three years of trading, quickly more than doubling. The gains have yet to stick.
Following the pattern makes this an easy playbook at first. Set a reminder to pick up a piece of SoundHound at the end of this year. Unload it after it quickly doubles to avoid the inevitable fall. Unfortunately there are no big-gain certainties when it come to investing. Let's take a quick look at this three-year streak. Then let's pivot to see what SoundHound can do to break these chains.
It's a sound loop
SoundHound AI went public in the springtime of 2022 as a special purpose acquisition company, or SPAC. It opened at $8.72. Three trading days later it more than doubled, hitting a fresh high of $18.14. It was all downhill from there. SoundHound stock closed out the year badly broken at $1.77, more than 90% below its earlier high.
Last year was an encore performance. Taking advantage of a dirt cheap starting line, the stock doubled by Feb. 6. Once again, the early upticks proved fleeting. SoundHound would surrender nearly all of those gains by the end of 2023.
This year has been even more volatile. It didn't double in 2024 until Feb. 20. The pop didn't stop there. The shares would double yet again by March 13, but then that sinking feeling kicked in shortly after it briefly skimmed double digits for the first time in two years. SoundHound has now plummeted 62% from its March high.
The patterns are there, but the assumptions don't match. History isn't repeating itself. In 2022 it was just a natural post-IPO pop, something that doesn't typically happen for a SPAC deal but it's not entirely unusual. Last year it announced in early January that it was accelerating plans to achieve profitability on the heels of a targeted restructuring. Just a couple of weeks later it lined up financing to beef up its balance sheet, giving investors one less short-term concern. Growth accelerated for all of 2023 and margins did improve, but it failed to deliver on its early promise of projected profitability.
This year has followed a different script. AI stocks started 2024 hot, and then Nvidia-- now the most valuable company in the country -- disclosed a small position in SoundCloud. It's also come through with back-to-back quarters of monster growth. Every year has started with a different reason adding helium to the rally, and a different pin striking the balloon.
Image source: Getty Images.
Getting it right the third time
SoundHound is rolling right now, even if the shares are losing steam. Year-over-year revenue growth has soared 81% and 73% in its two latest quarters, its strongest showing in more than a year. The midpoint of its full-year guidance implies that revenue growth will accelerate for the second year in a row. Profitability may continue to prove elusive for now, and it has posted larger-than-expected losses in its last two reports. The platform is still putting in the work.
SoundHound's AI-enhanced tools help its growing base of clients with speed recognition, computer-generated speech, and transcription. It's winning converts hoping to deliver a better conversational experience. It's on an annual run rate of tackling 4 billion queries.
Momentum is on its side with its recent heady growth, but margins took a step back in its latest quarter. Last month it announced that it paid off its existing debt, once again giving itself more time to get things right on the bottom line. An early arrival at positive net income could naturally change the narrative here, but it can also move higher in 2024 as a deficit-saddled company if it keeps growing and landing needle-moving deals while padding its bookings. It's time for something different, and right now that would mean holding on to its first-half gains and actually building on them in the second half of the year.
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
