Is SoundHound AI a buy now?

SoundHound AI (NASDAQ:SOUN) is an unusual animal. The company is a solid artificial intelligence (AI) expert with fantastic long-term business prospects. The stock is a volatile toy for get-rich-quick speculators on social media and Reddit (NYSE:RDDT) Forums. SoundHound AI shares rose 78% between the end of October and the closing bell on December 2nd.

I love the company and expect it to soar in the coming years – but I wouldn’t recommend buying it at these extremely high prices.

Let me explain.

SoundHound AI’s business prospects

The long-term future of this AI veteran looks incredibly bright.

SoundHound AI has developed an unprecedented speech recognition system after decades of AI-based audio analysis. The company serves a variety of industries, from in-car voice control to automated drive-thru ordering systems to telephone menus. Management estimates that the addressable market is more than $140 million in annual revenue, and SoundHound AI has many competitors but few comparable technologies.

The customer list includes well-known names such as Chrysler/Dodge/Jeep Stellantis (NYSE:STLA)the consumer electronics giant LG and the Chipotle Mexican Grill (NYSE:CMG) Restaurant empire. The roster is growing quarter by quarter and making great strides as SoundHound AI acquires smaller AI software developers with well-established customer relationships.

Quarterly revenue jumped from $15 million in recent quarters to over $25 million in the third quarter of 2024. Management forecast revenue of more than $150 million in 2025, or nearly $38 million per quarter next year. This radical growth is supported by a massive and growing backlog of long-term contracts, which totaled $723 million in the second quarter and “over $1 billion” three months later, including agreements signed under the most recent Acquisition of the enterprise software manufacturer Amelia was included. The backlog is converted into cash-based revenue as contracts are executed, with an average life of approximately six years per deal.

So SoundHound AI is on solid ground and has some impressive long-term goals. The stock is popular for robust reasons.

The meme stock phenomenon

At the same time, SoundHound AI’s stock price is being artificially inflated by treasure-seeking meme stock enthusiasts.

Encouraged by social media influencers on Reddit, X and other channels, many retail investors have bought SoundHound AI shares at rapidly rising prices over the last month. The idea is to disrupt the stock market system, force a large group of short sellers to do their pessimistic best, and trigger a rapid rise in the stock price. So-called short squeeze events can be spectacular, and SoundHound AI was an easy target with limited daily trading volume and more than 20% of stocks involved in short selling.

By timing this chart move correctly, SoundHound AI meme stock fans hope to convert their stock holdings into cash at just the right moment, before the short squeeze peak fades and the stock falls back to cheaper prices.

Patience is key for SoundHound AI investors

The attempted short squeeze push is running out of steam. SoundHound AI’s trading volume remains high and its stock price has risen sharply, but Reddit chatter has begun to slow and interest from short sellers has actually increased in November. Trading volume comes and goes.

One day I expect this mini bubble to burst. If this is the case, the vast majority of speculative buyers of SoundHound AI will miss the opportunity to monetize their paper profits. Even with stop losses and other defensive tactics in place, the sudden decline will send many shareholders deep. This is exactly how sudden price spikes play out in the real world.

After this sharp price correction, I might be tempted to double my investment in SoundHound AI. As I said, it’s a good company with excellent long-term growth prospects and I’ll almost certainly buy more of it if the price is right.

But the price is far from “right” right now, unless the stock fell before this humble article went through the publishing process. I highly recommend holding on to the SoundHound AI stocks you already own while preparing to pounce on a cheaper version of the same great stock. Time in the market is more important than the timing of the market, especially when the complex interplay of meme stock investors and short sellers determines price action.

Don’t miss this second chance at a potentially lucrative opportunity

Have you ever felt like you missed the boat when it came to buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts will provide one “Double Down” shaft Recommendation for companies that they think are about to collapse. If you’re worried you’ve already missed your investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: If you had invested $1,000 when we doubled in 2009, You would have $363,671!*
• Apple: If you had invested $1,000 when we doubled in 2008, You would have $45,954!*
• Netflix: If you had invested $1,000 when we doubled in 2004, You would have $486,533!*

Right now we’re issuing “Double Down” warnings for three incredible companies, and such an opportunity may not happen again in the near future.

See 3 “Double Down” Stocks »

*Stock Advisor returns from December 2, 2024

Anders Bylund holds positions at SoundHound AI. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Stellantis and recommends the following options: Short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.