SoundHound AI Has Been My Favorite Artificial Intelligence Stock in 2025. Here's Why I'm Not Changing Course in the Sell-Off.

I have bought more SoundHound AI (NASDAQ: SOUN) stock this year than any other artificial intelligence (AI) stock. The recent sell-off in pricey tech stocks won't make me stop. In fact, I wouldn't have bought any SoundHound AI shares at all if they hadn't taken a plunge first.

Let me explain.

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The secret to SoundHound AI's success

SoundHound AI is not a new company. It has been around since before smartphones were a thing, starting out with apps identifying songs by sound clips. More specifically, it developed AI tools that could detect fingerprint-like patterns in audio recordings, and the machine learning algorithm worked particularly well with hummed versions of the melody.

CEO and co-founder Keyvan Mohajer was satisfied with this role for many years, happy to run SoundHound (née Midomi) as a small, specialized service with minimal business ambitions. But then SoundHound AI started finding other applications for its AI-driven audio decoding software, and the ambitions blossomed.

SoundHound released the general-purpose Houndify system in 2016 and started to sign contracts. Five years later, it had secured deals with several global automakers and a couple of entertainment technology specialists. Then it was time to hit the stock market with an initial public offering (IPO) and the addition of "AI" to the company name. More car companies signed up, alongside a whole new class of restaurant chains -- automated voice controls are helpful at the drive-through window.

Since then, SoundHound AI has added many more clients including a close partnership with restaurant management specialist Toast (NYSE: TOST). Dodge and Chrysler parent Stellantis (NYSE: STLA) is taking the next step, rolling out SoundHound AI controls with new cars sold in Europe and Japan. American versions should follow, perhaps in 2025 or 2026.

This little AI expert is going places. The company finished 2024 with a backlog of $1.2 billion in unfilled orders (mostly based on long-term contracts that will generate revenues over several years). That's up 75% from the year-ago period.

Meme stock fever!

So there are plenty of reasons to love SoundHound AI as a company and technology developer. The stock, on the other hand, was way too expensive last fall.

The stock price soared from $1.70 to $8.00 per share in the spring, boosted by a small investment from AI giant Nvidia (NASDAQ: NVDA). That artificial price boost faded out over the summer, and it made sense to buy the stock again.

But then the meme stock community got a hold of SoundHound AI, inspired by its Nvidia connection and a large cohort of short-sellers. About 25% of its shares were on loan to bearish investors in November, setting the stage for an attempted short squeeze.

The idea is simple. Find a heavily shorted stock, where many pessimistic investors raked in quick funds in return for a bearish bet on the stock. For thinly traded names, an organized social media campaign can move the stock higher in a hurry.

If the underlying share price rises too high, some of the negative investors will have to close their shorting positions as the stock brokerage issues a "call to cover." These forced sales then push the stock price even higher, resulting in more calls to cover, and the cycle continues. Ideally, all the shorts would buy back their borrowed shares at ridiculously inflated prices, making lots of money for bullish investors.

But it didn't really work out that way. SoundHound AI's stock price rose all the way to $24.23 in late December but the short sellers didn't go away. The most recent data update on March 14 showed 116.6 million SoundHound AI shares on loan to the shorters. That's 33% of the publicly traded float.

Why I'm buying SoundHound AI again

As of March 25, SoundHound AI's stock was down 49.4% year-to-date. Priced at $10.20 per share, the stock is floating well above the Nvidia-inspired jump from a year ago, but I can finally buy and recommend the stock again with a straight face. It's been another year of robust business development, and I don't mind this price level anymore.

The short-squeeze attack appears to be over, leaving just some bad memories and an exaggerated number of short-sale investments in its wake. This is still a great company, and I'd rather pay a small premium for the stock than be left empty-handed in the long run. I just couldn't stomach the excessive price manipulation SoundHound AI experienced in December, and I'm glad it's over.

So if you're looking for a very practical implementation of AI concepts, aimed at several lucrative markets, SoundHound AI could be the best AI stock to buy right now. It's certainly on my short list of top ideas, anyway.

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Anders Bylund has positions in Nvidia, SoundHound AI, and Toast. The Motley Fool has positions in and recommends Nvidia and Toast. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.