SoundHound AI (SOUN 2.76%) has become a popular artificial intelligence (AI) stock for several reasons.
- It trades for around $5, making it accessible to many.
- Nvidia (NVDA 3.96%) has invested in it.
- It's a very small company (market cap of $1.6 billion), so it has plenty of room to grow to become a larger one.
With those thoughts in mind, many investors wonder if SoundHound could become the next Nvidia. Of course, this is referring to Nvidia's fantastic recent stock performance, as SoundHound and Nvidia's products are two entirely different things.
So, is SoundHound stock primed to explode higher? Let's take a look.
SoundHound's products will be in multiple locations soon
SoundHound is working on products that combine audio and AI. This is practical for applications like drive-thru or mobile ordering. If businesses can harness the power of AI in these areas without sacrificing customer satisfaction, they can save money on headcount within the restaurant. This transformation is already happening, as SoundHound has already revamped Jersey Mike's phone ordering system and White Castle's drive-thru order taking.
NASDAQ: SOUN
Key Data Points
Another area where SoundHound's products are being deployed is in vehicles. Voice assistants in cars have been clunky and borderline unusable in vehicles for a while. However, SoundHound is looking to change that perception. It has been working with Stellantis to integrate ChatGPT into its DS brand, giving users access to a more comprehensive audio assistant experience. It also partnered up with Nvidia to place its software on a GPU that already has a generative AI model built into it, removing the need for a reliable internet connection.
We're truly in the early innings of understanding how AI will change our lives, but understanding what a company like SoundHound is doing is a good first step. This kind of future excites investors about the stock, and many believe it could be the next Nvidia.
The company is sitting on a goldmine of future business
As mentioned above, SoundHound is still a very small company and doesn't generate much revenue. In the fourth quarter, SoundHound's revenue grew 80% year over year, but only to $17.1 million. That hardly offsets its $29.5 million operating expense bill, but given how small SoundHound is, this is to be expected.
The biggest item investors zoom in on is SoundHound's order backlog. This includes future revenue from long-term deals already signed, and if it delivers in these partnerships, it could make a SoundHound AI a lot of money. As of Q4, SoundHound's backlog is $661 million -- double the backlog at the end of Q3 2023. That large and fast-growing backlog is a big reason to invest in SoundHound, and it gives investors a reason to stick around through the company's ups and downs.
The stock has been a bit volatile lately, as it spiked once Nvidia revealed an investment in SoundHound. But it has come back down to earth recently and currently trades around 27 times sales. This is pricey, but it could be worth it if SoundHound converts a large portion of its backlog into firm revenues.
SOUN PS Ratio data by YCharts.
SoundHound looks like a promising small-cap investment, and if it works out, it could make investors a good chunk of money. However, it could also fail if its products don't work out or if a much larger AI company develops products that surpass SoundHound's technology. Investors must keep this in mind, but they can control the risk with position sizing.
Not every stock in your portfolio must have the same weighting -- you can weight your portfolio to reflect risk and opportunity. SoundHound has high risk and opportunity, making it a stock to only put around 1% of your portfolio in.
That way, if SoundHound becomes the next Nvidia and rockets higher, that position will quickly expand in your portfolio. But if it fails and fizzles out instead, the loss won't affect your overall balance too much.
SoundHound could very possibly become the next Nvidia, but it seems equally likely to be a bust. If you set your expectations accordingly, then SoundHound stock shows some promise.
