Investors are trying to gauge whether the stock’s sudden decline is a buying opportunity or a sign of what’s to come.
There’s no free lunch in the stock market. Life-changing investments almost always involve volatility. That’s simply the cost of admission when investing in high-risk, high-reward stocks.
SoundHound AI (SOUN 7.53%) has gained 150% over the past year, yet it is down approximately 55% from its all-time high in December.
Unfortunately, not every stock goes up forever. The tricky part of finding millionaire-making stocks is determining which companies have the fundamental business strength to rebound and make new highs. Investors today find themselves in this situation with SoundHound AI.
The company tells a promising story, and now, it’s about turning that into sustained revenue growth and profits. Can buying the stock on this pullback make you a millionaire? Here is what you need to know.
There is a simple explanation for why SoundHound AI stock crashed
SoundHound AI is a growing but speculative company that develops voice and sound artificial intelligence (AI) for vehicles, drive-throughs, and other applications. In late December, the stock soared to a blistering valuation, peaking at a price-to-sales ratio (P/S) of 110, making it among the most expensive stocks on Wall Street. Such high valuations are challenging to maintain because they create impossibly high expectations for the company.
Investors cooled on the stock, apparently underwhelmed after the company’s presentation at CES 2025 in early January. A showcase doesn’t necessarily mean much in the grand scheme of things, but it doesn’t take much to cause a sell-off when the valuation stretches that far.
The takeaway here for investors is that SoundHound AI’s decline is mainly about a stock that got way too ahead of its business fundamentals. There’s a solid argument that no stock, no matter how great the business is, should trade over 100 times its revenue. That’s unsustainable and doesn’t reflect the company’s traits or quality.
SoundHound AI is a promising but flawed business today
There is a lot to like about the business. For starters, it’s growing. The company is undergoing a significant growth spurt after acquiring Amelia in late 2024 to expand into new applications.
The acquisition brings an existing customer base that will help lift revenue from roughly $85 million in 2024 to a guided range of $155 million to $175 million in 2025.
Management estimates that SoundHound AI’s addressable market is $140 billion, indicating a significant growth opportunity. However, the company must continue penetrating new opportunities such as call centers, retail, electronic devices, and the like. Its long-term potential may ultimately depend on execution as it competes with others, including some in the “Magnificent Seven” that also offer audio-based AI technology.
The gauge for success and investment potential will be in financials, where SoundHound AI must show it can turn profitable while maintaining its growth. The company’s daily operations have burned just over $75 million in cash through nine months of 2024, so the business isn’t close to generating positive cash flow, let alone net income. The stock could struggle to maintain a high valuation until investors see a clear path to profits.
Is the stock a millionaire maker at these prices?
If you believe in a company, buying its stock at a lower price is better because future growth is less likely to be priced in. SoundHound AI’s P/S has fallen to about 24 (using 2025 revenue guidance). That’s far better than where it was a few months ago, but it’s still a stretch to call it cheap at these prices.
For example, SentinelOne, a growing but unprofitable cybersecurity company, trades at around 7 times its estimated revenue for this year. So, if SoundHound AI traded on par with SentinelOne, it would have to fall roughly 70% from here. Who knows whether that will happen, but such a wide range of valuations for similar stocks (growing but unprofitable) underlines the potential risks in buying shares here.
A potential millionaire maker will generally be riskier than most stocks already. Still, investors should do their best to find stocks with both upside potential and valuations that leave room for the massive investment returns achieved by reaching that potential.
SoundHound AI’s high valuation offers too little upside for the risks involved. Therefore, it’s probably not the potential millionaire maker you’re seeking.
Justin Pope 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.
