Summary

• Nvidia's exit from SoundHound AI has led to significant downward pressure on the stock, which remains overvalued despite recent declines.

• I maintain a 'sell' rating on SoundHound AI due to its excessive valuation, even after a 28% drop on Friday.

• SoundHound AI's upcoming Q4 earnings report may not be enough to change investor sentiment, despite the company's growth in non-automotive sectors.

• The AI software company also needs to prove that it can maintain its rapid pace of top line growth while improving its EBITDA profile.

• The biggest risks for SoundHound AI are its high revenue multiplier and potential continued investor exodus following Nvidia's stake sale.

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Shares of SoundHound AI (NASDAQ:SOUN) experienced significant downward valuation pressure on Friday after it was reported that chip-maker Nvidia sold off its stake in the AI start-up. According to the company’s 13-F Holdings report, released on February 14, 2025, Nvidia completely sold out of its position in SoundHound AI. Since the conversational AI company is still very much trading at an excessive valuation multiplier, based off of revenue, I believe shares will continue to experience downward pressure, and the company’s fourth quarter earnings – which are set to be released at the end of the month – may not do much to sway investor sentiment. SoundHound AI also needs to prove that it can maintain its high rate of top line growth, which will be hard to do, in my opinion.

Data by YCharts

Previous Rating

I rated shares of SoundHound AI a sell in my last work on the AI start-up, published at the beginning of 2025, when they just hit a new all-time high: Be Fearful When Others Are Greedy. While SoundHound AI faces attractive long-term growth prospects, especially in the company’s core automotive market, I believe shares have run way ahead of their fundamentals... even after a 28% downside revaluation on Friday. The upcoming earnings report will likely be reasonably good as the company has momentum in non-automotive sectors, but concerns about a revenue slowdown are real.

Nvidia Exits SoundHound AI Position After A Little More Than One Year

Nvidia (NVDA), the world’s leading GPU maker, is making select investments in companies that management believes have some kind of promising technology. Nvidia’s investment portfolio includes well-known name such as Arm Holdings (ARM) or Applied Digital (APLD) in the technology sectors.

Nvidia also invested in SoundHound AI in the fourth-quarter of FY 2023 and owned a relative small position of 1.73M shares (equivalent to about half a percentage point of outstanding shares) in the leader of conversational AI technology. The news that Nvidia was an investor in the AI start-up sent shares of SoundHound AI soaring ~836% in 2024.

Based off of Nvidia's 13-F Holdings report – which was filed with the Securities and Exchange Commission on February 14, 2024 – investors realized last week that Nvidia no longer owned its stake in the AI software leader. On the other hand, Nvidia's portfolio now includes stakes in WeRide (WRD), a Chinese AI start-up that focuses on autonomous driving, as well as Nebius Group (NBIS), a start-up that builds AI infrastructure. While shares of WeRide surged 83% on Friday, SoundHound AI's shares plummeted 28% and fell for the first time since December 2024, below $11.

Nvidia 13-F Holdings

Given the massive increase of SoundHound AI’s valuation since Nvidia invested in the start-up, the most likely reason for Nvidia to close its position is profit taking, although there may be other factors here at play as well. The Nvidia exit strong changes the investment setup for SoundHound AI, mainly because Nvidia's investment in the AI company was why shares of SoundHound AI were attractive to investors in the first place.

Likely Strong Earnings Report Ahead

SoundHound AI is set to report earnings for its fourth fiscal quarter at the end of the month (on February 27, 2025) and the market expects an adjusted loss of $0.09 per-share. Compared to Q3 2024, losses are also expected to expand, from $(0.04), while the company is projected to continue to grow its top line rapidly.

Seeking Alpha

SoundHound AI has been quite successful in scaling its operations and signing on new customers for its core AI products in non-automotive sectors, which means the firm is likely to report strong top line growth for Q4 2024. Currently, the market expects $33.7M in revenue (+96 Y/Y growth).

Seeking Alpha

However, SoundHound AI needs to prove that it can maintain its rapid top line growth. Analysts currently expects a significant drop-off in its growth in FY 2026, as the market for AI-driven voice automation is set to become more competitive. Further, SoundHound AI is not yet profitable and did not make as much progress in terms of improving its EBITDA profile as one would have expected maybe. While operating and EBITDA losses have narrowed in the last several years, I expect SoundHound AI to remain unprofitable on an EBITDA level in the near future.

SoundHound AI

The Bubble Is Finally Bursting...

Despite a considerable decline in the company’s market cap so far in 2025 (shares are down about 46% since my last work was published), shares of SoundHound AI are still very much overpriced, in my opinion.

SoundHound AI's voice recognition business, which is driven chiefly by innovation related to artificial intelligence, is currently trading at a price-to-revenue ratio of 21.4X, which is about 1.5X higher than the P/S ratio that Nvidia is priced at. In my last work on the AI company, I calculated a fair value of $7 per share, which I still believe is a realistic stock price target, especially with investor sentiment taking a major hit last week.

While SoundHound AI clearly has a ton of expansion potential in the market for conversational AI technology – especially in sectors like automotives, restaurants or customer service – shares don’t have an attractive risk profile here, in my opinion. Also, despite losing nearly half of their value since early January, shares are still 83% more expensive than they were historically.

Data by YCharts

Risks With SoundHound AI

The biggest risk for the AI start-up, as I see it, relates to the lofty valuation that seems to me to still be decoupled from the firm's fundamentals. This is not to say, however, that SoundHound AI’s growth prospects are weak: the firm is seeing healthy growth in the addressable market as technological improvements in AI are creating new use-cases for SoundHound AI’s products. However, with such a high revenue multiplier, the biggest risk for SoundHound AI is a continual exodus of investors now that Nvidia has exited its stake in the company. Further, there is a risk of continual operating/EBITDA losses and slowing top line growth in a market that is set to only get more competitive.

Final Thoughts

Shares of SoundHound AI are down 56% from their all-time highs and with Nvidia selling off its stake in the AI company, the odds are in favor of continual downward valuation pressure. After all, it was Nvidia’s investment in SoundHound AI that put the company on the radar for investors in Q4 2023. Shares of the AI start-up still remain very highly priced and with investor sentiment changing following the exit news of Nvidia, I believe SoundHound AI’s upcoming Q4 2024 earnings report must be stellar to stem the exodus of investors and neutralize negative investor sentiment. While I like SoundHound AI’s growing addressable market in conversational AI, I believe SoundHound AI is still very much overvalued and does not represent an attractive AI investment opportunity.