Why SoundHound AI Stock Skyrocketed 85% in November

Shares of voice assistant technology company SoundHound AI (NASDAQ: SOUN) 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.

Should you invest $1,000 in SoundHound AI right now?

Before you buy stock in SoundHound AI, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $859,528!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of December 2, 2024

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.