SoundHound AI stock falls 18% despite 89% Q3 revenue jump

Key points

• SoundHound AI stock dropped 18% on Wednesday.

• The selloff followed strong Q3 earnings that topped estimates.

• SoundHound AI expects to double its revenue in 2025.

The leader in AI voice technology beat earnings and revenue estimates and raised its outlook for fiscal 2024 and next year.

SoundHound AI (NASDAQ: SOUN) has been one of the top performers this year, with shares up about 190% year-to-date.

But on Wednesday, the stock price fell about 18% to around $6.20 per share, despite the fact that the company, a leader in AI-voice technology, posted excellent third-quarter earnings.

Specifically, SoundHound generated $25.1 million in revenue, up 89% from the same quarter a year ago. That was better than the $23 million that analysts had anticipated.

Further, the young firm had a net loss of $21.8 million, or 6 cents per share, which was 8% more than Q3 of 2023, but it was better than analysts estimates of a 7 cents per share net loss.

The company also raised its revenue outlook for both fiscal 2024 and 2025, which may lead some investors to wonder why the stock price was falling.

“Killer app” for generative AI

SoundHound AI is one of the leaders in the growing AI-voice technology industry. Its technology is used in cars, restaurants, call centers, and other places and apps where speech recognition, text to speech, music and content recognition, and voice-recognition features are used.

SoundHound AI caught the attention of a lot of investors earlier this year when AI powerhouse NVIDIA invested in the company and took a minority stake in SoundHound.

The stock has been on a tear since, up over 200% for the year, before Wednesday’s selloff. In fact, it had spiked 52% from November 4 through 11, rising with the market after the election of Donald Trump as U.S. president.

So, the pullback on Wednesday could be in reaction to the sharp run-up last week, which is not a bad thing, considering the valuation has skyrocketed. SoundHound has a sky-high price-to-sale ratio of 37, up from 19 after the June quarter and 11 in the third quarter of 2023.

It may also be due to the net loss rising 8% and the gross profit margin dropping 24.3 percentage points to 48.6%. That is likely due to costs associated with the acquisition of Amelia, a conversational AI leader which will expand SoundHound into new verticals such as finance, insurance, and healthcare.

“This is SoundHound’s largest quarter on record as the company takes its first steps into important new verticals,” Keyvan Mohajer, CEO and co-founder of SoundHound AI, said in the earnings release. “Our increased scale, combined with incredible market enthusiasm for conversational AI, is allowing us to execute on the company’s vision. We believe that voice is the ‘killer app’ for applied generative AI.”

Expanding its customer base

The acquisition of Amelia has been a big step in the development of SoundHound, as it not only expands the company into new markets; it also broadens its customer base.

In Q3, only 12% of revenue was concentrated within the company’s largest customer, compared to 72% in the prior year.

Further, the industry diversification is in better balance with automotive, restaurants, financial services, healthcare, and the insurance sectors each contributing 5% to 25% of revenue. That’s compared to more than 90% being concentrated in automotive in Q3 of last year.

Some of its customers include AeroMexico, BNP Paribas, Hoffman Financial Group, Nordic Bank, Resorts World Las Vegas, Sterling National Bank, Chipotle, Casey’s General Stores, Lancia, and Stellantis, to name a few.

“This quarter we transformed the company and continued to diversify our customer base, adding more products and expanding into new verticals,” Nitesh Sharan, CFO of SoundHound AI, said. “We are broadening our target markets and are confident about the medium to long-term opportunity in front of us. This greater potential is reflected in the increased revenue outlook we are providing.”

Doubling its revenue in 2025

The rapid growth has led SoundHound to boost its revenue target for fiscal 2024 to a range of $82 million to $85 million, up from $80 million after Q2 and $65 million to $77 million after Q1.

It also boosted its revenue outlook for 2025 to a range of $155 million to $175 million, up from $150 million after Q2. This would be almost double its expected 2024 revenue.

There is a lot to like about SoundHound AI over the long-term, but its valuation is a concern. That’s why Wednesday’s selloff may be a good thing and a necessary reaction by the market.

The median price target for SoundHound AI is $7 per share, which would be a modest 12% gain. This is a stock that should be on your radar, but wait for the right opportunity to dive in, assuming there could be another selloff due to its high valuation.