On paper, artificial intelligence specialist SoundHound AI (NASDAQ:SOUN) appears to be compelling. From its corporate profile, the company offers a voice AI and speech recognition software, enabling businesses across various industries to deliver high-quality conversational experiences to their customers. Nevertheless, the present concern is that SOUN stock is overvalued. Further, this dynamic is materializing during a period when similar tech firms are struggling.
On the positive front, little doubt exists that SoundHound provides a relevant service. The global generative AI market could become a $1.3 trillion ecosystem by 2032. Under this umbrella, the global speech and voice recognition market size reached a valuation of $12.62 billion last year. By 2032, the subsector could be worth $84.97 billion. That’s a compound annual growth rate (CAGR) of 23.7%.
As a technology speculator, it’s easy to see why so many are intrigued by SOUN stock. Following Wednesday’s close, SoundHound carries a market capitalization of $1.22 billion. Thus, the addressable market is huge.
To be sure, SOUN stock has richly benefited, moving up over 90% on a year-to-date basis. However, in the past five sessions, it’s down 11%. What’s more, AI behemoth Nvidia (NASDAQ:NVDA) incurred a loss of nearly 4% during the midweek session. Its rival Advanced Micro Devices (NASDAQ:AMD) slipped almost 6%.
Priced for Perfection
The broader market action suggests that there may be a rotation away from risk-on assets. It’s worth pointing out that the cryptocurrency sector – perhaps the ultimate in risk-on markets – suffered a steep decline in value recently. So, it pays to be prudent.
What makes SOUN stock particularly vulnerable, though, is its nosebleed valuation. Per GuruFocus, SOUN trades at 19.73x trailing-year revenue. The sales multiple for the software industry sits at only 2.22X.
Of course, the bullish argument is that SOUN stock will eventually grow into its premium. I don’t necessarily disagree with that notion. However, it’s important to trade the data. Even assuming that SoundHound hits next fiscal year’s most optimistic revenue target of $105.72 million (last year, it printed $45.87 million), the multiple would come out to 11.58x.
So, investors must do some probability analysis of their own. Is it more realistic for SOUN stock to fall back to a more reasonable valuation or is SoundHound’s sales potential grossly understated?
Trade of the Day: SOUN Stock Put Options Beckon
As a trader, you need to read the data and go wherever the numbers take you. In this case, the 17 May 2024 $3.50 put appears to be an attractive idea to exploit the downside momentum.
First, the contract closed at a premium of 39 cents, which might attract bargain hunters. Second, it features relatively decent engagement metrics with open interest of 470 contracts. Further, volume could rise if the AI space continues to look shaky. Finally, the May 17 expiration date will likely follow SoundHound’s first-quarter earnings report.
Notably, Nvidia will release its results on May 22. Again, if AI-related concerns facilitate sustained volatility, it’s possible that as we approach the put option’s expiration date, more investors will decide to pocket their profits. If so, the downdraft could capsize the smaller players.
However, it’s important to note that Thursday’s premarket trading saw some positive action. So, it may be prudent to wait for an intraday pop before buying the puts.
To note, I’m not permanently bearish on SOUN stock. Rather, as with anything in life, sometimes an asset’s price tag can overshoot its fundamentals. That may be what’s happening here. Those who are long-term bullish on SoundHound AI should consider the volatility as good news overall. It may give you a chance to back up the truck.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
