Shares of SoundHound AI (SOUN 5.77%) rose 347% in February, according to data from S&P Global Market Intelligence. You didn't misread that -- the voice-control and audio analytics expert more than quadrupled its stock price last month.
The massive gain was based on an unexpected investment. Artificial intelligence (AI) hardware giant Nvidia (NVDA 6.18%) disclosed a modest stake in SoundHound AI, lighting a red-hot fire under the stock.
A tiny investment can make a big difference
Let's start with Nvidia's investment.
On Feb. 14, the chip designer filed a form 13F with the Securities and Exchange Commission (SEC). This investment-disclosure filing raised eyebrows because it formally revealed Nvidia's ownership of stock in other companies for the first time. It was a short list of five names, and SoundHound AI made the cut.
It wasn't a large investment. Nvidia spent roughly $3.7 million on SoundHound AI shares, or 0.6% of the company's total value. But investors saw the buy as a vote of confidence in SoundHound AI's business. The stock closed 67% higher the next day.
Nvidia's disclosure had similar effects on the smaller names in that list, such as self-driving truck technologist TuSimple Holdings and AI-powered medical imaging expert Nano-X Imaging.
But none of them surged as much as SoundHound AI that day. The stock briefly soared 80% higher the next morning before settling down to a single-day gain of 66%.
SoundHound AI's market momentum firmed up after this catalytic event. The company's conversational in-car assistant based on ChatGPT became commercially available in Stellantis vehicles the next week. Nvidia added more fuel for the fire in the last week of February as it formed a broad alliance to pursue AI innovation in the telecom sector. SoundHound AI wasn't specifically mentioned in that announcement, but the stock still rode 75% higher in two days just by basking in the halo of Nvidia's AI developments.
Two weeks later, SoundHound AI published its fourth-quarter 2023 business update. The stock fell 19% the next day after the company fell short of Wall Street's consensus estimates.
Is it time to take action on this volatile AI stock?
Last month's soaring gains look quite speculative. You should know that Nvidia's investment wasn't mentioned in SoundHound AI's fourth-quarter report, nor did it make an appearance in the earnings call. The brutal market reaction wasn't all about the modest earnings miss; some investors probably wanted to hear more about the Nvidia connection and what it might mean for SoundHound AI in the long run.
But the honest answer is that Nvidia doesn't play a significant part in SoundHound AI's business today. The investment was barely notable at all, and certainly shouldn't have inspired a 300%-plus rise in the audio specialist's stock price.
That being said, I'm not sitting on my hands with this promising growth stock anymore.
I started a modest position in SoundHound AI after the sharp price drop on March 1. The stock may very well dive again, and the short- to mid-range forecast calls for heavy turbulence. But I do believe that SoundHound AI has a lot of growing to do in the long run, and I'd rather settle for a potentially overpriced entry point today than miss out on a stellar long-term growth story.
Your mileage may vary, depending on your appetite for risky but promising investments. Don't buy SoundHound AI shares with the money you had earmarked for next month's mortgage payment or the kids' college fund. But I do recommend taking a closer look at this company's AI-powered growth prospects before perhaps following my lead.
