Last year was a big one for stock splits. Major companies from Walmart to Chipotle Mexican Grill launched such operations, and players in the market’s hottest growth industry — artificial intelligence (AI) — got in on the movement too. Leading chipmaker Nvidia, networking giant Broadcom, and equipment maker Super Micro Computer each announced and completed stock splits last year after their prices soared.
And after each new stock split, investors’ biggest question was: “Which market giant will be next to join this list?” Though these operations don’t change anything fundamental about a stock or the company, they could be seen as a generally positive sign. (I’ll talk more about that later.) For now, let’s get to that investor question and consider if one of today’s most explosive growth stories could be the next candidate for a stock split. I’m talking about SoundHound AI (SOUN -1.14%), a company that’s reported double-digit revenue growth quarter after quarter and has seen its stock soar more than 800% over the past year. Let’s take a closer look.
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SoundHound’s voice AI technology
You may not have heard of SoundHound before, but you might have interacted with its products without even realizing it. The company is a voice AI specialist, serving customers in industries such as automotive, restaurants, and healthcare. SoundHound’s voice products stand out from the crowd thanks to its technology that results in higher quality communication; it translates speech directly into meaning, passing by the common step of translating the speech into text.
The company has launched products in the areas of “smart ordering,” vehicle intelligence, and employee assistance, just to name a few.
All of this has resulted in significant growth quarter after quarter. In the most recent period, SoundHound reported an 89% increase in revenue to $25 million and made progress expanding its business across industries. Five different industries each contributed 5% to 25% to revenue. Just a year earlier, 90% of revenue came from the automotive sector. SoundHound is in high growth mode, expanding its platforms and its reach across industries, and investing in its technology. So, it’s not surprising the company isn’t yet profitable, reporting a net loss on a generally accepted accunting principles (GAAP) basis of about $21 million in the quarter.
Now, let’s consider the possibility of a stock split. Companies often split their stocks after a period of huge gains, and we can clearly say that SoundHound has seen its stock take off. The company has proven itself to be a popular choice among investors seeking future AI winners.
How a stock split works
A stock split, by offering more shares to current holders, brings down the price of each individual share, something that may be necessary if gains have led a stock to reach very high levels. For example, the level of about $1,000 a share may be a psychological barrier for some investors — they might hesitate to buy a stock for this price even if the valuation looks OK.
Stock splits don’t change anything fundamental about the company or the stock, so market value, the value of your holding if you already own the shares, and the stock’s valuation remain the same. That’s why a stock split on its own isn’t a reason to buy or sell a stock. But a stock split could be viewed as generally positive as it can make a stock more accessible to a broader range of investors, and a company’s move to split its stock could suggest management is optimistic about the future and the potential for the stock to keep on climbing.
As mentioned, SoundHound’s stock has soared, but the price hasn’t reached a level that makes it difficult to access. Today, it trades for about $15 a share. And a stock split won’t lower the valuation, so it wouldn’t actually make SoundHound cheaper for investors.
SoundHound hasn’t split its stock in the past, meaning we don’t have clues about whether the company is amenable to such operations or not. But I would say that right now, a stock split isn’t really necessary for SoundHound. So I wouldn’t expect this AI player to be the next company to launch a split even after the stock’s enormous gains in recent times.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
