Down 56%, Should You Buy the Dip on SoundHound AI?

As 2025 draws to a close, it likely hasn't been a year to remember for investors in SoundHound AI (NASDAQ: SOUN), at least not for its positive vibes.

Shares of the sound and conversational artificial intelligence (AI) company have slumped by more than 50% since this time last year. It's worth noting that SoundHound is an emerging company and a highly speculative stock. So, volatility sort of comes with the territory.

That said, it's time to step back and evaluate. Should investors buy the dip on SoundHound AI? Here is what you need to know.

Image source: Getty Images.

A rubber band stretched tight

Investors have a lot to like in SoundHound, which I'll discuss next. However, first, investors should understand why a stock like this can be so volatile.

It often boils down to the stock's valuation. SoundHound has fetched quite a premium in a stock market where investors are enthusiastic about AI and up-and-coming companies. A year ago, it was one of Wall Street's most expensive stocks with a price-to-sales ratio of more than 109.

Investors can think of valuations as expectations the market has for a stock. The higher the valuation, the more growth or good news the market anticipates. As valuations become extremely high, it creates an effect similar to a tightly stretched rubber band.

Imagine you're holding a rubber band, stretching it as tightly as it can go without snapping. Even a minor pluck, and that rubber band does some wild things. The idea works similarly with stocks.

SoundHound sliding, even more than 50%, shouldn't be a surprise when you're starting at a valuation above 100 times its revenue. The market has become somewhat shaky in recent months, which is likely a significant reason the stock has tumbled.

Exploring SoundHound AI's promising upside

There is much to like in SoundHound AI, which specializes in sound and conversational AI software.

The company initially focused on the automotive industry, where its AI would interpret hands-free commands in vehicles. Since then, it has done a great job of expanding beyond those borders. Organically and through strategic acquisitions, SoundHound is getting into restaurants, drive-thrus, banks, call centers, and more.

It also isn't the only company in its field. SoundHound AI competes with others, including some in the "Magnificent Seven." But unlike many of its competitors, SoundHound is willing to cede control and privacy to its customers. It doesn't require customers to give up their data or make it known who is providing the AI technology.

The business model has worked well so far. SoundHound's revenue continues to grow at an impressive rate, including a 68% year-over-year increase in the third quarter. The business is losing money, but that's typical of fast-growing companies. Importantly, SoundHound has zero long-term debt and $269 million in cash, enough to fund the business for more than two years at its current rate.

Lastly, the future looks bright. Conversation-based technology will be crucial to the widespread adoption of AI, especially in consumer-facing applications. Management cites a $140 billion total addressable market, so even if it doesn't lead the field, there is plenty of room for SoundHound to grow and thrive over time.

Should investors buy the dip?

That last point is crucial. SoundHound currently has a market cap of just $4.5 billion at its current share price. Again, investors don't necessarily need SoundHound AI to become a massive company for the stock to perform well.

Analysts estimate that SoundHound will finish the current year at $168 million, followed by $233 million next year. That amounts to about a 39% increase, valuing the stock at just over 19 times next year's revenue estimates. I wouldn't call that a bargain, but it's reasonable for a business with such rapid growth.

Could the stock remain volatile? Investors should probably count on it. But if SoundHound AI can continue to innovate and win enough business to sustain its growth, the stock has all the makings of a potential long-term winner. There's definitely enough meat on the bone for bold investors to consider buying this dip.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends SoundHound AI. The Motley Fool has a disclosure policy.