After a Massive Runup, SoundHound AI Stock Is Headed for a Fall, According to 1 Wall Street Analyst. Is it Time to Sell the Stock?

Investors in SoundHound AI (SOUN -15.76%) might be developing a case of whiplash. The stock quickly shed 23% by early February, but the artificial intelligence (AI) and voice recognition specialist suddenly turned and bolted higher. It is currently up 250% year-to-date (as of market close on Wednesday).

However, the tide on Wall Street is beginning to turn, and one Wall Street analyst believes the stock will be battered against the rocks.

AI boom or bust?

Analysts at Cantor Fitzgerald have soured on SoundHound AI, issuing a rare double downgrade to “underweight” (sell) from “overweight” (buy) while simultaneously slashing their price target to $4.90. That represents a potential downside for investors of 38% compared to Wednesday’s closing price.

The crux of the analyst’s bearish take was valuation, as the stock is selling for 40 times sales. However, the analyst also cited a host of other concerns regarding SoundHound, including:

  • A business in its infancy
  • Murky operating model
  • Decelerating growth
  • Insufficient capital spending
  • Potential customer losses
  • Potential competition from big tech

Given the pessimism, is the stock a sell?

I have no doubt that SoundHound AI is a risky stock. In its annual report, the company cited “intense competition,” suggesting big players could catch up to its leadership in voice AI technology. Furthermore, three customers accounted for 62% of its revenue. The loss of any of these could be problematic.

What concerns me most is how the company accounts for its subscription backlog. Generally, backlog describes contractually obligated revenue that hasn’t been recognized as revenue. SoundHound AI says its subscription backlog “refers to potential revenue achievable” given a number of assumptions. So, while investors may be relying on that backlog as future revenue, it’s not necessarily written in stone.

To be clear, many of the issues cited by the analyst aren’t new but were raised in light of SoundHound AI’s recently frothy valuation. That said, the stock is risky and investors should exercise caution. If SoundHound AI doesn’t address the laundry list of issues cited above, investors may want to hit the sell button, as Cantor Fitzgerald recommends.

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.

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