Shares of SoundHound AI (NASDAQ: SOUN) were pulling back today in line with the broader market sell-off on a hotter-than-expected inflation reading. The high inflation report makes it less likely that the Federal Reserve will lower interest rates later this year, and high-priced, unprofitable, growth stocks are generally more sensitive to interest rates and inflation than the rest of the stock market.
Considering SoundHound’s dramatic surge this year, this may be doubly true for the AI stock. As a result, the company’s stock was down 7.1% as of 1:25 p.m. ET.
A new SoundHound risk gets exposed
The Bureau of Labor Statistics reported this morning that the Consumer Price Index (CPI) in March rose 0.4% from February and was up 3.5% from a year ago. Those numbers were above consensus forecasts of 0.3% monthly growth and 3.4% annual growth.
Core inflation, which excludes food and gas prices, rose 0.4% from February and 3.8% from a year ago. Both numbers were above estimates, as well.
The news sent stocks falling broadly as investors believed it would lead to the Federal Reserve lowering its number of planned interest-rate cuts. Lower rates tend to favor growth stocks like SoundHound AI, as those stocks are valued based on earnings in the distant future, according to the discounted cash flow model. When interest rates are low, those earnings are worth more than when rates are high.
What’s next for SoundHound AI?
It’s easy to see why SoundHound would be sensitive to macroeconomic conditions. The company still had minimal revenue of just $17.1 million in its most recent quarter. Though it’s growing fast, with revenue up 80% in the fourth quarter, much of that new revenue comes from companies experimenting with its voice activation technology, and its customers are less likely to embrace new technologies or spend on new products when times are tough.
While the economy currently looks stable, high inflation and interest rates could cool off, putting pressure on stocks like SoundHound AI, which is small, unprofitable, and expensive at a trailing price-to-sales ratio of 24.
Should you invest $1,000 in SoundHound AI right now?
Before you buy stock in SoundHound AI, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 8, 2024
Jeremy Bowman 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.
Why SoundHound AI Stock Was Falling Today was originally published by The Motley Fool