The significant surge in SoundHound AI's stock value by 85% occurred during November.
Shares of voice tech company SoundHound AI (SOUN 2.28%) saw a monumental 85.1% surge during November, as per data from S&P Global Market Intelligence. The company did release its Q3 2024 financials during the month, yet strangely enough, this didn't spark a price increase. Instead, the stock dipped after its Q3 report.
The company's revenue jumped an astounding 89% year-on-year in Q3, reaching a new high of $25 million. However, acquisitions took a toll on profit margins. The gross margin dropped to 49% compared to 73% in the previous period. Consequently, while revenue was soaring, gross profit growth was more sedate at 26%, and the net loss actually expanded.
The stock tumbled post-report, but it climbed sharply on many other trading days that month, as the graph below demonstrates.
There's a strong case that the AI market's buzz is leading traders to pile into SoundHound stock, pushing it up. This trend is not uncommon in recent years and explains why the stock rose throughout November despite investors showing disinterest in Q3 results.
Is SoundHound a rising star?
SoundHound is undeniably becoming a contentious investment, with shorts betting on a decline while traders bet on a rise. But is there a substantial business beneath the hype? Absolutely.
SoundHound specializes in AI-driven voice technology and boasts prominent clients such as Honda Motor, Chipotle Mexican Grill, and Block. Furthermore, the company successfully secures new customers, a crucial factor for reducing risk for a small corporation. Remember, last year, its top five customers accounted for an alarming 90% of its business. Loss of any of those clients would have been disastrous. But thanks to new customer acquisitions, these top five now make up less than 33% of the company's business.
The volume of significant client wins attests to SoundHound's leadership position in this sector. And with the industry estimated to be worth $140 billion, SoundHound, projecting $150 million in revenue next year, is well-positioned for sustained growth.
What's the investor strategy now?
SoundHound's divided investor base could lead to stock volatility. Anyone investing in shares today should have a long-term perspective while being comfortable with short-term fluctuations.
With a P/S ratio of 46, I'd recommend being patient with SoundHound stock, considering the drop in profit margins. Management assures that the issue will be resolved post-integration of recent acquisitions. For now, I suggest observing if this indeed happens before making an investment.
Despite the current stock volatility, investors interested in SoundHound should consider its long-term potential due to its strong position in the $140 billion AI voice technology market. With a projected revenue of $150 million next year, the company has already secured high-profile clients like Honda Motor, Chipotle Mexican Grill, and Block, reducing its reliance on a few major clients.
In terms of financing and investment, SoundHound's potential for profit growth and market dominance makes it an interesting option, especially given the significant revenue increase of 89% year-on-year in Q3. However, investors might need to consider the temporary impact of recent acquisitions on profit margins, as demonstrated by the decrease in gross margin from 73% to 49%.