SoundHound AI Is Plummeting Today -- Is It Time to Buy the Stock?

SoundHound AI (NASDAQ: SOUN) stock is losing ground today following the company's third-quarter earnings report Tuesday evening. The company's share price was down 18.7% as of 12:15 p.m. ET.

SoundHound AI published third-quarter results after the market closed yesterday, delivering sales and earnings for the period that actually came in significantly better than anticipated. The company posted a non-GAAP (adjusted) loss of $0.04 per share on sales of $25.09 million in the period, beating the average Wall Street call for a per-share loss of $0.07 on revenue of $23.03 million.

Sales were up roughly 89% year over year in the quarter, and margins improved on some fronts. Despite the performance beats, the stock is seeing big sell-offs today.

Is it time to buy SoundHound AI stock?

In addition to strong sales and earnings beats in Q3, SoundHound also raised its performance targets for this year and next year. SoundHound now expects sales to come in between $82 million and $85 million -- improving from its previous call for revenue of more than $80 million. Meanwhile, it's targeting revenue between $155 million and $175 million for 2025 -- up from previous guidance for sales of more than $150 million.

Even after today's big pullback, the stock is still up roughly 26% over the last month. There really weren't any unexpected, negative surprises in the company's Q3 report. Performance in the quarter and guidance actually beat most expectations, and today's sell-off appears to be driven by a "buy the rumor, sell the news" dynamic. The stock is still up roughly 191% year to date, and investors may have been looking for even more explosive performance beats to justify doubling down on bullish positions.

The big question surrounding SoundHound is whether it can live up to its highly growth-dependent valuation. While the business is posting rapid sales growth, the conversational-AI company is currently valued at roughly 26.7 times this year's expected revenue. As a result, SoundHound AI stock is likely to continue to be highly volatile. For investors without high risk tolerance, the company's valuation is probably still too speculative to justify getting in at today's prices.

On the other hand, SoundHound's near-term financial outlook has actually improved compared to most previous estimates. For those who were bullish on the stock yesterday, there wasn't anything material in its Q3 report that would be cause for the shattering of a bull thesis -- and today's pullback could actually present a buying opportunity. But in order to minimize risk, it may still be a good idea to employ a dollar-cost-averaging strategy rather than buying a large amount of shares all at once.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.