Shares of voice assistant technology company SoundHound AI (SOUN 12.62%) skyrocketed 85.1% during November, according to data provided by S&P Global Market Intelligence. The company did report financial results for the third quarter of 2024 during the month. But oddly enough, this didn’t serve as a catalyst to send the stock higher. To the contrary, the stock actually dropped following its Q3 report.
In Q3, SoundHound’s revenue soared by 89% year over year to a record $25 million. But acquisitions hit the company’s profit margins. Its gross margin dropped to 49% compared to 73% in the prior-year period. Therefore, while revenue was skyrocketing, its gross profit was up a less impressive 26%. And its net loss actually widened.
Immediately following the report, SoundHound stock dropped. But it was up sharply many of the other days that the market was open, as the chart below shows.
SOUN data by YCharts
There’s reason to believe that as hype builds for artificial intelligence (AI), traders are piling into SoundHound stock to force it higher. This has been a common occurrence in recent years and explains why the stock rose for most of the month even though investors didn’t appear to like the company’s Q3 results.
Could SoundHound be an up-and-coming company?
It’s clear that SoundHound is becoming a polarizing investment, with short-sellers betting it goes down whereas traders are piling in to make it go up. But is there an actual business here to take notice of? Indeed there is.
SoundHound makes voice assistant technology powered by AI and it has an impressive list of customers that includes Honda Motor, Chipotle Mexican Grill, and Block. And it importantly continues to add new customers, which is key in reducing risk for this small company. Consider that last year, its top five customers accounted for a whopping 90% of its business — losing any of those customers would have been devastating. But thanks to new customer wins, its top five customers now only account for less than 33% of its business. That’s huge.
Winning so many important customers shows that SoundHound is a leader in this space. And that’s important considering the market is estimated to be worth $140 billion. By comparison, SoundHound only expects $150 million in revenue next year, positioning it for robust long-term growth.
What should investors do now?
A polarized investor community could lead to volatility with SoundHound stock. Anyone who buys shares today needs to have a long-term focus while being comfortable with short-term volatility.
That said, trading at 46 times sales, I believe there’s some room to be patient with SoundHound stock, especially considering how its margins have dropped. Management says that issue will correct as it integrates recent acquisitions into its business. For now, I would patiently watch to see if that’s indeed the case before buying.
Jon Quast has positions in Block. The Motley Fool has positions in and recommends Block and Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
