In the world of artificial intelligence (AI) investments, few would debate that Nvidia is at the top of the world. But what many investors don't know is that Nvidia is an investor itself.
Because Nvidia has investments totaling at least $100 million, it must disclose those holdings to the Securities and Exchange Commission (SEC) in a 13F filing, reported quarterly. Its latest report included five companies, but one I am most interested in is SoundHound AI (SOUN 5.77%).
SoundHound's products are seeing wide adoption
For Nvidia to invest in a particular AI player is a big deal, as innovators throughout the industry rely on its sophisticated chips. This means the company likely has more information than the average person on SoundHound's prowess, which investors should note.
From the name, it's obvious that SoundHound AI does something with audio and artificial intelligence. Its products are mainly focused on two areas: restaurants and automobiles. But its audio products can easily expand into other areas.
One example of a use in the automobile sector is its integration of ChatGPT into Stellantis DS vehicles. This will give drivers a much more powerful digital assistant experience, and 50% of regular drivers say they will utilize it.
On the restaurant side, SoundHound recently announced a revamped phone ordering experience with Jersey Mike's Subs. This fully automated experience can take multiple orders at once with extreme accuracy, freeing employees up to do other tasks rather than take orders.
This type of automation will only become more prevalent, and a recent study by SoundHound found that 8 of 10 customers believe this kind of order will be the standard in the next few years.
SoundHound's product rollout is just in the early stages, and with the heightened awareness of AI capabilities, mass adoption will likely occur soon.
But does that make the stock a buy?
SoundHound's stock is very expensive
SoundHound is a relatively small company, posting only $17 million in revenue during the fourth quarter of 2023 (and that was up 80% from the same period the year before). However, it has a massive backlog, with $661 million still in the pipeline for deals already signed. If SoundHound delivers on these deals, it will produce impressive growth, which is likely why Nvidia is investing in it.
The problem with cash-burning companies like SoundHound is that it's a race against the clock to become profitable. While the company ended 2023 with almost $100 million in cash, it lost more than $68 million in operations and relied on loans and new equity for its funding. Fortunately, management has been prudent with its cash balance and improving its margins. SoundHound's losses in earnings per share (EPS) improved from $0.15 to $0.07. And given SoundHound's success and massive backlog, it shouldn't have an issue raising additional capital if it needs more liquidity.
So far, SoundHound seems like a stock that could be a great investment. But there's still one factor to consider: valuation.
Buying the right stock at the wrong price can be disastrous. SoundHound AI was a well-priced stock at the start of the year, but after a strong quarterly report and news of Nvidia's investment, its price exploded.
SOUN PS Ratio data by YCharts
SoundHound's stock is incredibly expensive around 38 times sales, especially when other AI software stocks trade between 10 and 20 times sales. But if SoundHound can grow its revenue from $17 million per quarter to $100 million per quarter in a few years, today's stock price may not be a bad deal.
It all comes down to its future execution, which is impossible to judge right now. So what should investors do?
If you're interested in the company and believe it has a strong chance to succeed, taking a small position (no more than 1% of your portfolio) isn't a bad idea. That way, it won't affect your portfolio too much if it fails. But if it succeeds, it will still make a strong return.
SoundHound has a great product and a lot of momentum, but that's already priced into the stock. Investing now means you have extreme confidence in SoundHound due to its steep price. As a result, I'd wait until the pandemonium caused by Nvidia's investment dies down a bit before taking a position in SoundHound.
