In Q2, Steven Cohen’s Point72 fund liquidated its entire stake in SoundHound AI (NASDAQ:SOUN). The startup, known for its focus on voice applications of agentic AI, has seen its share prices skyrocket over the last year as investors have piled into high-growth artificial intelligence stocks.
Why did Steven Cohen sell SoundHound AI stock, and what could this decision signal to investors who are looking at SOUN today?
A Little About Cohen’s Investment Strategy
Steven Cohen’s investment strategy is one marked by a high volatility tolerance, deep reliance on both fundamental and technical analysis and, like many successful investors, a healthy degree of contrarianism.
Cohen tends to focus on high-risk, high-reward investment opportunities in which he believes that his expertise gives him an edge over the broader market. This strategy, paired with rigorous risk management across the Point72 portfolio, has allowed him to deliver exceptional returns over his long hedge fund career.
The Possible Role of SoundHound’s Valuation
One of the first possible reasons that suggests itself for Cohen’s decision to sell SoundHound is the fact that the stock may have become substantially overvalued. Following a nearly 250 percent increase in share prices over the last year, SOUN now trades at over 56 times its sales despite having only delivered one quarter of net profitability in the last three years.
If valuation played a role in Cohen’s decision to sell, he wouldn’t be the only one to conclude that the stock has become too expensive. The average analyst price target for SOUN is $16.56, which would imply a loss of roughly 13 percent from the most recent price of $19.06.
SoundHound’s Fading Technology Dominance
Even as SoundHound’s prices have headed for the stratosphere, its moat has become narrower than it once was. While SoundHound certainly remains the strongest startup in the conversational AI space, it is facing increasing competition from Alphabet and Amazon, particularly in the quick-service restaurant category.
These two tech giants have significant advantages over SoundHound in terms of cloud computing resources and spending capabilities, suggesting that they could overwhelm what was previously believed to be a durable moat around SoundHound’s business.
217% Increase in Top Line
One factor that likely hasn’t disappointed Cohen when it comes to SoundHound is its revenue growth in recent months. In Q2, when Cohen was selling his shares, SoundHound was able to deliver a blistering 217 percent increase in its total revenue to $42.7 million. The business also introduced its restaurant voice AI services to notable chains like Red Lobster and IHOP while expanding with other chains that were already among its customer base. In its automotive category, SoundHound also broke into the potentially very lucrative Chinese auto market.
What SoundHound didn’t deliver in Q2, however, was meaningful momentum toward sustainable GAAP profitability. Though gross profit rose 96 percent, gross margin actually fell by 24 percent. Net losses, meanwhile, expanded from $37.3 million in the year-ago quarter to $74.7 million.
Although SoundHound has a strong balance sheet that includes about $230 million of cash and cash equivalents with no debt, the fact that the business is still losing money at an increasing rate could be deeply worrisome for investors, especially in light of the possible loss of its technology moat mentioned above.
SoundHound, therefore, represents a business that is growing extremely quickly but which is still generating substantial losses. The current hype around AI in the broader market has allowed the stocks of such businesses to soar to remarkably high prices, but it’s not clear how long these stocks will be able to maintain their high-flying valuations.
Where Is Cohen Putting His Money Instead?
While selling SoundHound, Cohen was also adding to some of his other top technology positions. Of particular note in Q2 were a 66 percent increase in Point72’s Microsoft holdings and a 207 percent increase in its NVIDIA holdings. Other buys included Amazon, Arista Networks and Snowflake.
From these moves, it seems that Cohen is likely moving capital from high-risk positions like SoundHound to more probable long-term winners in the AI space, particularly NVIDIA. Where SoundHound has a technological edge and the potential for massive growth, NVIDIA has already delivered on its promise and achieved near-total dominance over the GPU market. Unlike SoundHound, NVIDIA is also strongly profitable.
It’s interesting to note that Cohen isn’t the only major hedge fund manager pursuing this kind of strategy at the moment. Recently, Ken Griffin of Citadel Advisors made a similar move in selling almost half of his Palantir stake while investing heavily in NVIDIA shares. This may suggest a broader trend of smart money moving from high-risk stocks with excessively high valuations into safer tech businesses with dominant market positions.
Why Did Cohen Sell SoundHound?
At the end of the day, Steve Cohen’s decision to sell SoundHound looks like a case of selling a highly valued but largely speculative asset to generate cash that can be invested into more stable, dominant businesses. Despite its impressive performance, SoundHound is still trading at a massive premium to its trailing 12-month sales and losing substantial amounts of money.
Given his buying activity in Q2, Cohen appears to be moving toward safer businesses, albeit ones that still have the potential for very positive growth associated with AI. This may suggest that Cohen believed the upside in SoundHound had largely run its course and that stocks like NVIDIA and Microsoft would deliver a better risk-reward balance.
It’s also worth considering the disproportionate risk SoundHound could carry if and when the increasingly talked-about bubble forming around AI stocks eventually bursts. In such a scenario, highly profitable businesses with a focus on AI like NVIDIA and Microsoft would likely fare much better than largely speculative businesses like SoundHound.
This brings us to the question of whether SoundHound still looks like a good buy today in the wake of its Q2 earnings. Though there’s little doubt that the business is expanding at a remarkable rate, the ongoing losses and the high price of the stock could both be deterrents to all but highly risk-tolerant investors. At the moment, SoundHound is likely too speculative and too expensive to appeal to most investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.