SoundHound AI stock has room to run after its crash, according to one Wall Street analyst. Is the stock a buy after a 50% drop?

This year has been a non-stop thrill ride. SoundHound AI (Soun 5.76%) investor. After starting 2024 with a loss of 23% through February 5, the artificial intelligence (AI) and speech recognition specialist turned around, posting gains of 323% through March 15. It then took a downward turn, losing half its value as of Wednesday’s market close. . Even after that whiplash-inducing rally, the stock is still up 112% since the beginning of the year.

One Wall Street analyst sees the decline as a positive thing.

Low risk but still dangerous

Cantor Fitzgerald analyst Brett Knoblauch upgraded SoundHound AI stock from underweight (sell) to neutral (hold), maintaining a $4.90 price target. This is a level that has room for an increase of about 10% compared to Wednesday’s closing price.

The analyst previously issued a rare double downgrade on SoundHound AI, largely as a result of its frothy valuation of 40x sales. However, the analyst also noted a number of other concerns that suggest SoundHound AI is a risky stock. The valuation has now been reduced from 45 times sales to 22 times sales, with Knoblauch suggesting that the downside risk and upside potential are now equal.

I still believe investors should exercise caution. The same risks that analysts originally highlighted are still at play, including an opaque operating model, lack of capital spending and potential customer loss.

There is another problem. SoundHound AI acknowledged in its 2023 annual report that it had identified “material weaknesses in our internal controls over financial reporting,” which led the company to restate several financial statements. This is a serious red flag that could get the attention of regulators.

I’ve also raised concerns in the past about how SoundHound accounts for its backlog. After management “updated” these metrics, the backlog now includes “committed customer contracts” and “potential achievable revenue”, which are heavily dependent on management assumptions.

Even after significant retracking, SoundHound AI still hasn’t made a profit, despite posting 22x sales. Investors should pay attention to these volatile high-flying moves.