SoundHound AI (SOUN 0.22%) has been one of the hottest stocks on the market in the past six months, rising close to 128% during this period. But if you're one of those who missed this AI stock's outstanding rally and are thinking of buying it right now, it would be a better idea to look elsewhere.
That's because SoundHound stock has pulled back substantially of late thanks to concerns that its growth may not be strong enough to support its rich valuation. Shares of the company, which provides voice AI solutions, are down nearly 55% in the past month. Despite this sharp pullback, SoundHound AI stock is trading at 22 times sales. That's substantially higher than the U.S. technology sector's price-to-sales (P/S) ratio of 7.2.
Of course, SoundHound is projecting robust revenue growth in 2024 and beyond, and also claims to have a solid revenue pipeline. But SoundHound is a small company and there is a good chance of it running into stiff competition from well-heeled rivals. That's why investors looking to buy an AI stock right now might want to consider buying an established name such as Nvidia (NVDA 3.46%). Let's look at the reasons why.
Nvidia is growing at a much faster pace than SoundHound AI
Nvidia is the dominant player in the fast-growing market for AI chips. It commands an estimated 90%-plus share of the market, and as a result, business has been growing rapidly in recent quarters.
NVDA Revenue (Quarterly) data by YCharts.
As the chart above shows, Nvidia's growth has been much stronger than that of SoundHound AI. That's despite the fact that Nvidia is a much bigger company and generated almost $61 billion in revenue in fiscal 2024 (which ended in January this year), an increase of 126% over the prior year. SoundHound AI, on the other hand, finished 2023 with a 47% increase in revenue to $46 million.
What's more, analysts are forecasting Nvidia's revenue to clock faster growth in the current fiscal year as well. The chipmaker's top line is predicted to increase 81% to $110.5 billion in fiscal 2025, which would be higher than the 51% revenue growth that SoundHound is expected to deliver this year. So Nvidia's robust share of the AI chip market, which is slated to clock an annual growth rate of 61% through 2027, puts it in a terrific position to sustain its healthy growth momentum.
Moreover, Nvidia is a profitable company. It reported a non-GAAP gross margin of 73.8% in fiscal 2024, a nice jump from 59.2% in the previous year. This strong jump in the company's margin, which can be attributed to Nvidia's robust pricing power in AI chips, explains why its adjusted net income shot up to $32.3 billion in fiscal 2024 from $8.4 billion in the preceding year.
SoundHound AI, on the other hand, reported a net loss of $89 million in 2023. Though that was lower than the $117 million loss it reported in 2022, analysts aren't expecting it to turn profitable any time soon.
SOUN EPS Estimates for Current Fiscal Year data by YCharts.
Nvidia, meanwhile, is expected to deliver annual earnings growth of almost 38% for the next five years. However, don't be surprised to see Nvidia delivering faster growth. That's because Nvidia is on track to benefit from a much larger addressable opportunity that includes markets such as gaming, automotive, and digital twins.
More specifically, the global GPU market is forecasted to grow at an annual rate of 34% through 2032, generating revenue of $773 billion at the end of the forecast period. We have already seen that Nvidia is the leading company in the market for AI GPUs, and it holds a similar position in the personal computer (PC) GPU market as well. This market presents another lucrative growth opportunity for Nvidia.
Similarly, the digital twin market presents another multibillion-dollar growth opportunity for the company. SoundHound AI, meanwhile, expects its addressable market to grow to $160 billion by 2026. All this indicates that Nvidia has more room for growth in the long run. That's why choosing the chipmaker over SoundHound looks like a smart move, especially considering the forward valuation multiples of both companies.
The valuation makes buying Nvidia stock a no-brainer
Nvidia is trading at 36 times sales, which is higher than SoundHound's trailing sales multiple. But the situation changes when we look at the forward sales multiples.
NVDA PS Ratio (Forward) data by YCharts.
Both stocks have an identical forward P/S ratio. Moreover, Nvidia's solid profitability tells us why it is trading at 36 times forward earnings, which is lower than the U.S. technology sector's earnings multiple of 45.
We have already seen that Nvidia is a better growth stock when compared to SoundHound, and it could continue growing at a faster pace in the future as well. So investors who missed SoundHound's rally and are looking for an AI stock to buy right now would do well to choose Nvidia, as it seems in a better position to deliver gains to investors in the long run.
