While Nvidia (NVDA 6.18%) may be one of the top artificial intelligence (AI) stocks out there, it's also making some investments. Because Nvidia had $100 million or more in investments, it was required to file a 13F, which revealed Nvidia's investments to the public.
Among its holdings was SoundHound AI (SOUN 5.77%), another AI company. With Nvidia at the forefront of nearly all things AI, taking its advice on what companies it's investing in is a smart move. So, should you follow Nvidia's lead and buy SoundHound AI stock? Let's find out.
SoundHound's product is being used in many applications
You can probably deduce from its name that SoundHound AI does something with audio, and you'd be right. SoundHound AI's Audio platform is used by clients in many industries, most notably in the restaurant and automotive industries.
This allows its customers to automate order-taking, just like it did when it helped White Castle automate its drive-thru experience. The performance of SoundHound's product exceeded the benchmark of a typical human, making the switch a no-brainer.
On the automotive side, SoundHound partnered with OpenAI to integrate ChatGPT into Stellantis's DS vehicles, a French brand. While many automakers used digital assistants for years, they haven't been useful. However, with more powerful generative AI assistants, DS found that drivers used them 50% more often. This illustrates SoundHound's products' usefulness, which could be why Nvidia is investing.
However, one thing to consider is that Nvidia's investment in SoundHound is very small. The value of its holdings as of the filing was $3.7 million. For reference, Nvidia had about $26 billion in cash on its balance sheet for its fourth quarter of fiscal year 2024 (ended Jan. 28).
The SoundHound AI investment is just a drop in the bucket and won't move the needle meaningfully, even if the investment rose by 100 times in value.
Still, that doesn't mean investors can't take advantage of a great company.
Investing in small caps can be tricky
SoundHound's Q4 revenue rose 80% year over year to $17.1 million, and its earnings per share loss improved from $0.15 last year to $0.07. That's a positive sign for small-cap investors, as businesses can only burn cash for so long.
Perhaps the most significant factor is SoundHound's booking backlog, which is $661 million. That's much larger than its quarterly revenue and shows that SoundHound has a product that its clients want; it's just taking time for customers to integrate and launch the product.
While investors need to be careful assuming that bookings will be automatically converted to revenue, it's a sign of potential success.
But you must pay up to own SoundHound. At 30 times sales, SoundHound demands a massive premium, but this wasn't always the case.
SOUN PS Ratio data by YCharts
Since Nvidia filed its 13F on Feb. 14, the stock is up 165%. So, much of the new interest in SoundHound's stock comes solely from Nvidia's investment in the company.
But does this disqualify the stock from ownership? I'd say no. Many other software companies (like Palantir and CrowdStrike, which trade around 25 times sales) aren't growing nearly as fast as SoundHound. This doesn't make SoundHound a stock to go all-in on, either.
Because SoundHound is still working on integrating its technologies with other use cases, the best days are still ahead. Whether that turns into a company worth owning remains to be seen.
In the meantime, if investors are excited by SoundHound's prospects, I'd say take a position in it, but make it no larger than 1% of your portfolio. That way, if it goes belly up, you won't notice. But if it becomes a 10-bagger, it will make up a much larger portion of your holdings.
You have to pay a premium to own SoundHound's stock, but it may be worth it if its AI audio technology becomes more common in everyday usage.
