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

SoundHound AI (NASDAQ: SOUN) stock is crashing Friday. The company's share price was down by 26.7% as of 11:45 a.m. ET, and had been down as much as 31.8% earlier in the trading session.

The plunge was apparently driven by the news -- disclosed Friday morning in a Securities and Exchange Commission filing -- that Nvidia had sold its stake in the company in the fourth quarter of 2024. With the artificial intelligence (AI) hardware leader pulling its backing, some investors are worried about the conversational AI specialist's outlook.

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Is SoundHound AI stock a buy on this massive pullback?

While Nvidia's decision to sell its stake in SoundHound AI isn't a positive signal, the move should still be put in context. Previously, Nvidia only owned roughly 1.71 million shares of the company. As of market close on Dec. 31, that stock position would have been worth roughly $34 million. Meanwhile, Nvidia currently has a market capitalization of approximately $3.36 trillion as of this writing.

In other words, Nvidia's stake in SoundHound was always relatively tiny -- and never big enough to even come close to moving the needle for the graphics processing unit leader. The divestment won't have any immediate material impact on the conversational AI specialist's business, and it's possible that the market is overreacting to the news.

On the other hand, Nvidia's recent stock sale does highlight some risks for SoundHound investors. For starters, the company is still valued at roughly 26.5 times this year's expected sales even after Friday morning's big sell-off. While SoundHound has been serving up fantastic sales growth and seemingly has a long runway for expansion, this dramatic stock move is precisely the type of volatility that companies with heavily forward-looking valuations often experience.

Nvidia's decision to drop its stake in SoundHound AI could also signal that the company plans to devote more resources to expanding in the conversational AI space -- and that it no longer sees the smaller company as a clear technological front-runner in the category. In some ways, Nvidia's focus on agentic AI software at this year's CES show may have foreshadowed this dynamic.

SoundHound AI is an early mover in a category that's still in an early stage of its long-term growth trajectory. That position comes with both benefits and risks. While the company has done an impressive job of increasing the adoption of its software, there has always been a risk that resource-rich competitors will enter the fray and use their financial, infrastructural, and relational advantages to become winners in the category.

For risk-tolerant investors who see promise in SoundHound AI's long-term potential, Friday's sell-off could offer a buying opportunity (within the context of a dollar-cost-averaging plan) as the business's material outlook hasn't changed in any substantial way. On the other hand, more risk-averse investors who still want exposure to AI trends should probably seek out other plays in the space.

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