Is SoundHound AI a good investment or just a meme stock? Learn why social media isn’t always the best investment guide.
Shares of SoundHound AI (SOUN 22.14%) started Thursday’s trading with a modest gain and kept climbing nearly all day long. When the closing bell rang, the stock had jumped 22.1% higher.
Meme stock frenzy
The company had no news to report today. It’s earnings season, but SoundHound AI will publish its third-quarter results next Tuesday. The company didn’t file any documents with the Securities and Exchange Commission (SEC) today, nor did it send out any press releases.
It was a generally strong market day for several reasons, but SoundHound AI’s stock shouldn’t outperform the rest of the market for that reason.
But there are other forces at work. The provider of artificial intelligence (AI) tools for audio interpretation and voice controls is acting like a meme stock today.
The ticker was trending on the popular r/wallstreetbets stock-trading channel on Reddit (NYSE: RDDT) today as several influencers suggested heavy buying ahead of the upcoming-earnings report. Many posts also highlighted SoundHound AI’s substantial short-sales interest at 24% of the total share count, setting it up for a sudden short-squeeze jump.
This is a relatively small stock with a market cap of $2.5 billion today and $2 billion at Wednesday’s market close. A dedicated group of social media users have the power to move the price of stocks with this profile — small, lightly traded, and with large short-selling interests.
About 69 million SoundHound AI shares changed hands today, more than triple the average trading volume over the last month.
SoundHound AI’s fundamentals are the real deal — but you shouldn’t buy it today
I like SoundHound AI for its long-term business prospects, not for its potential to deliver quick profits with the help of social media campaigns.
After building an unparalleled audio-interpretation platform for decades, the company has entered a new era of big-time business plans. The client list is long and growing, with many leading carmakers, restaurants, and consumer-electronics giants. The backlog of unfilled orders and subscription-style contracts stood at $723 million in the latest-earnings report and will probably be significantly larger in next week’s report.
So yeah, I agree with the meme stock crowd that SoundHound AI is a good investment, but I wouldn’t buy it today. These skyrocketing price spikes usually fade out in a matter of days, often reversing into negative territory. And they do absolutely nothing to help the company run its business or find more customers.
In other words, I would put SoundHound AI on the back burner while this online media frenzy lasts. The upcoming Q3 report will have my undivided attention, and I’m particularly interested in how the order backlog is growing. This is not the right time to buy SoundHound AI stock.
Anders Bylund has positions in SoundHound AI. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
