Back in February, Nvidia (NASDAQ: NVDA) released its first-ever 13-F filing, which revealed that the company bought a handful of stocks in the final quarter of 2023. Each of them has a presence in the artificial intelligence (AI) industry, so it's a good way for Nvidia to capture value from that space outside its core semiconductor business.
Nvidia bought 1.7 million shares of SoundHound AI (NASDAQ: SOUN), which were valued at $3.6 million at the end of 2023. With SoundHound stock now trading at $4.50, Nvidia's position is worth around $7.8 million -- implying a whopping 116% gain in less than a year.
SoundHound is a specialist in conversational AI, and it has accumulated an impressive list of customers. The company's revenue is growing quickly, and management's forecast for the future is incredibly strong. So should investors follow Nvidia into the stock?
Image source: Nvidia.
A leader in conversational AI
SoundHound has developed a suite of conversational AI products for companies in the hospitality, automotive, and food service industries. They are trained to recognize voice inputs and respond in kind, so the user can leverage the power of AI without having to type a single word.
Restaurant chains use SoundHound AI to autonomously take customer orders in the drive-thru and in-store, which reduces the workload on employees. Family sports bar and grill chain Beef 'O' Brady's just rolled out SoundHound's AI ordering system across all corporate locations, and it has given franchisees the option to use it, too.
Many restaurants also use SoundHound's Employee Assist software, which is custom trained for each location to give workers information about the menu, internal policies, and more. Chipotle, Krispy Kreme, and Five Guys are just some of SoundHound's other notable restaurant customers.
On the automotive side, SoundHound's Chat AI voice assistant is now live across six brands from Stellantis, including Peugeot and Alfa Romeo. It's capable of feeding the driver information on a variety of topics on command, whether it's the weather, sports scores, or the status of an upcoming flight. Plus, SoundHound's AI Vehicle Intelligence product is trained on the manual of each vehicle, so drivers can instantly access information about its features.
At the beginning of August, SoundHound announced the acquisition of Amelia, an AI company that helps businesses create and deploy virtual agents to serve their customers and employees. The combined companies will serve hundreds of customers, and the deal will expand SoundHound's reach into other industries like healthcare, insurance, financial services, and more.
SoundHound is growing rapidly
SoundHound generated $13.5 million in revenue during the second quarter of 2024, a whopping 54% increase from the year-ago period. The strong result (combined with the acquisition of Amelia) prompted management to increase its full-year guidance for both 2024 and 2025.
The company now expects to bring in $80 million this year, which would be a 74.3% increase from its 2023 result, followed by at least $150 million in 2025 (including $45 million from Amelia), which will represent accelerated growth of 87.5%.
Plus, SoundHound ended Q2 with a record $723 million in bookings, which nearly doubled from the year-ago period. Bookings represent the company's order backlog, so its long-term revenue pipeline also looks very robust.
However, SoundHound's bottom line is a concern because the company is still investing heavily in growth at the expense of profitability, and will probably continue doing so until it achieves scale. That resulted in a $37.3 million net loss during Q2, which was a 60% increase from the year-ago period.
The company's non-GAAP (generally accepted accounting principles) net loss -- which strips out one-off and non-cash expenses like stock-based compensation -- was better, coming in at just $14.8 million, a slight improvement from $16 million in the year-ago quarter.
SoundHound ended Q2 with $200 million in cash on its balance sheet, so it can afford to sustain losses for the foreseeable future. However, there is a risk the company will require a capital raise at some point in the future prior to achieving sustained profitability, and that typically dilutes existing investors.
The stock might deserve a small spot in your portfolio
Based on SoundHound's trailing-12-month revenue of $55.4 million and market capitalization of $1.6 billion, its stock trades at a price-to-sales (P/S) ratio of 29.1. That makes it even more expensive than Nvidia, which trades at a P/S multiple of 27.3! Considering that Nvidia operates at the forefront of the AI industry and has a track record of success that spans decades, it would seem unreasonable for SoundHound stock to trade at a premium valuation.
However, SoundHound's revenue growth is actually poised to outpace Nvidia's in 2025 (so long as management's guidance is accurate). Based on SoundHound's $80 million in forecast 2024 revenue, its stock trades at a forward P/S ratio of 20.1. Its P/S ratio falls even further to just 10.7 based on the company's forecast 2025 revenue.
Therefore, investors willing to hold SoundHound stock for at least the next two years might be scooping up a bargain at the current price. The story looks even more promising over the longer term, because the company believes enterprise spending on AI will top $250 billion within the next three years.
With all that said, I want to end with a very important point. SoundHound is still in the early stages of monetizing its AI products, and the journey won't always be smooth. So it might be best for investors to keep their position sizing small to mitigate the potential risks. After all, not even Nvidia has gone all in -- it's a $2.6 trillion company, so it probably won't sweat the $3.6 million loss if its investment in SoundHound stock doesn't work out.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
