No sector has been hotter over the past few years than artificial intelligence (AI).
The juggernauts in the space Nvidia and Palantir get the most attention, but other companies are also trying to tap into that same investor enthusiasm.
One that has largely succeeded is the AI voice platform SoundHound AI (SOUN 1. 65%) Its stock has experienced extreme volatility, but overall, it has had a nice run over the last year.
Volatile stocks can be more ne to do stock splits, depending on their price levels. Is SoundHound AI next.
Understanding stock splits Before we dive into whether SoundHound AI is the next stock split, investors need to understand what a stock split is and why a company may choose to do one.
Image source: Getty Images. Stock splits vide companies the ability to decrease their price and increase their outstanding count.
On the other hand, there are also reverse stock splits, which do the opposite. A reverse or forward split is a way for a company to increase its stock price and lower its count.
In both stock splits and reverse stock splits, the market cap -- and therefore an investor's equity position -- does not change.
For example, if an investor owns 10 s of a stock trading at $200 per for a total equity position of $2,000.
If the company conducts a 2-for-1 stock split, the investor will essentially receive two s for each one they own, meaning 10 s would increase to 20 s.
Then you take the equity position of $2,000, which won't change, and divide by the new count of 20, arriving at a new stock price of $100. As you can see, the count rose and the stock price declined.
A stock split can make a stock seem easier to buy for investors and also boost liquidity.
This may be an attractive option if a stock just went on a big run and now trades at hundreds or even thousands of dollars per.
A reverse stock split can be especially handy if a stock is struggling and has run into compliance issues with a major exchange the Nasdaq Composite (^IXIC 0. 94%) or the New York Stock Exchange.
Both exchanges require stocks to trade above $1 for at least 30 consecutive trading days, so if a company wants to stay on either exchange, its only option might be to do a reverse split.
Is SoundHound AI next. Investors have been excited by SoundHound's conversational intelligence AI capabilities, where there are plentiful use cases in automobiles, television, and use.
SoundHound's ducts and services can be used to enhance and create efficiencies in customer service, smart ordering, and voice assistants.
The stock is down nearly 45% this year (as of July 6), but up roughly 165% over the past year. Trading over $11 with a nearly $4.
5 billion market cap, SoundHound AI doesn't appear to be at any risk of breaching compliance issues with the Nasdaq.
According to MarketWatch, over 34% of the s are being sold short, so many investors believe it will decline.
That could happen considering the company's multibillion-dollar market cap and lack of any core fitability. A bad environment for stocks could hit companies this hard.
Still, Wall Street is fairly optimistic the name. Of the seven Wall Street analysts covering the company, four say to buy the stock, while three say to hold.
Perhaps management wants to get the stock price higher to give off the perceived success that other AI stocks have had, but I'm not sure if there's any real need to do this.
The majority of SoundHound AI's s outstanding are part of the public float, so this, plus the fact the stock trades on a major exchange, should ensure plenty of liquidity.
Ultimately, I don't see any real need for management to conduct any kind of stock split right now. Bram Berkowitz has no position in any of the stocks mentioned.
The Motley Fool has positions in and recommends Nvidia and Palantir nologies. The Motley Fool has a disclosure policy.