Why SoundHound Could Be a Short Squeeze in the Making

When spotting a shift in any stock’s sentiment, the gauge investors lean on for their ideas usually considers only one side of the equation. That side is who is buying the stock, as far as any big investors or other institutional buyers. There is strength in numbers and knowing that the so-called “smart money” has done enough homework to justify having a position in the underlying stock.

However, the other side of the equation is barely considered. This means looking at who is selling the stock and how much of it is currently held in short positions. When the scale tilts too much to the short-selling side, any hint of upside potential or sharp moves can trigger what is known as a short squeeze, a concept that will be explained in just a bit.

Before understanding the implications and effects of a short squeeze, investors should be aware that shares of SoundHound AI (NASDAQ:) Inc. are a prime example and potential target of a short squeeze in the making. Being part of the technology sector and witnessing the excitement around artificial intelligence’s development and adoption makes this stock a potential winner for the coming months and quarters.

What a Short Squeeze Could Mean

Shorting a stock means that a market participant has to borrow someone’s shares in order to sell them in the open market. Since the person doesn’t own the stock itself, they are termed to be “short” the stock. A short seller will make money if the stock price decreases, allowing them to purchase it at the lower price and resell it at the original price, thereby booking a profit.

However, when the stock price rises, the short seller must buy and return the stock at the original price, incurring a loss. Simply put, closing a short position requires the seller to buy the stock to flatten his or her book.

In this sense, no matter the intention, the stock will see added buying pressure when short sellers need to close out.

This is why spotting stocks with high short interest can be a fantastic strategy, since a sharp upside move could trigger a massive buying spree when all these short sellers need to leave the scene and cut their losses.

Now, considering that SoundHound reported up to 31.5% of its shares being held in short positions, it sets up a scenario where a short squeeze could be easily triggered moving forward, bringing on the sort of upside all traders look for.

How Much Upside Can SoundHound Deliver?

Considering that the stock has already delivered a 10.4% rally over the past month, outperforming the S&P 500 index by over 6% during that period, investors may wonder whether the company has additional room to reach a higher ceiling moving forward.

Given that the stock’s 52-week high was roughly $24 per share, it is not far from reality to consider that this stock could double its price under the right conditions, and some on Wall Street still believe it can. For example, Scott Buck from HC Wainwright reiterated his Buy rating for SoundHound stock as of mid-May 2025.

Not only does this analyst still consider SoundHound a Buy, but also was willing to value it at up to $18 per share to call for as much as a 78% upside from where the stock has fallen today.

Now, those who rightfully think a stock is cheap for a reason may need to consider that, due to its smaller size and popularity in the sector, this name might have no negative reasons to miss out on the Liberation Day recovery rally.

The opposite may be true, considering that despite a low stock price, the overall market is still willing to overpay for the company’s balance sheet and future financial potential.

Investors can see this theme at play simply by spotting SoundHound stock’s massive 202x price-to-book (P/B) ratio.

This valuation calls for a significant premium to the rest of the computer sector’s average 6.8x valuation today. Before old-school value investors say this makes the stock unattractive and filled with a downside, they should remember that the market always has a fundamental reason to overpay for stocks it believes can outperform in the near future.

Thinking about that 78% upside potential coming out of Wall Street and the amount of short interest that might need to be washed out if this valuation is proven correct, it makes all the sense in the world for the market to overlook what might seem an “expensive” valuation in return for achieving above-average returns.

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