If you're an investor who missed out on buying Nvidia (NVDA -0.22%) before it took off last year, you're not alone. Or you may be like me, who sold the stock after a solid gain but missed out on a lot more by selling far too early.
If you're in that boat, don't worry. There are more stocks you can buy that have the potential to rocket higher, like Nvidia did. One of those is SoundHound AI (SOUN 4.09%), one of the five public companies that Nvidia itself is invested in. So, if you can't go back in time to buy Nvidia, why not take a stab at one of the companies it thinks will succeed?
SoundHound is working with several key partners
SoundHound AI is about applying artificial intelligence (AI) to audio and performing tasks with it. Right now, this is taking two forms: Restaurant ordering and digital assistants in cars.
With restaurants, this means replacing a traditional drive-thru with a digital assistant. White Castle recently partnered with SoundHound to make this upgrade and found that the performance was better than that of a human. If SoundHound's products can improve an experience while saving a restaurant on headcount expenses, that's a big win.
It's also partnering with OpenAI to put its ChatGPT models in Stellantis DS vehicles. With a much more powerful digital assistant available to drivers, they should be more apt to use the technology. However, this could be an issue if the vehicle does not have connectivity, as many of these assistants require an internet connection to function properly.
However, Nvidia and SoundHound are changing that notion. The two teamed up to place SoundHound's technology on an Nvidia chip that doesn't require connectivity. This allows the technology to function anywhere at any time and increases the use cases of digital assistants.
Those are just two examples of where SoundHound's technology is seeing mass adoption, but there are many more applications where SoundHound's products could be useful.
This excitement is why many investors are curious about the company and believe it could have a huge upside.
SoundHound's stock has a massive upside
Another reason for the optimism behind SoundHound's stock is its relatively small size. In the fourth quarter, SoundHound's revenue grew 80% year over year, but only to $17 million. However, its backlog increased to $661 million, demonstrating how much business the company has in the pipeline.
If SoundHound can rapidly convert this backlog into revenue and capture additional deals, the stock could explode higher, as it's currently a small-cap company due to a relatively small business base.
But, the stock does come with a premium price tag.
SOUN PS Ratio data by YCharts
Because the company has no profits to speak of, we'll value it by its sales. Anything greater than 20 times sales is very expensive, and SoundHound's stock crosses that threshold. However, this is to be expected, with many investors excited about the company's prospects. In particular, some investors are ready to look past valuation issues whenever Nvidia is involved.
But if SoundHound can convert a chunk of its backlog into revenue, this rich valuation ratio will go down. However, that's if the stock price doesn't rise, and any huge news like that would undoubtedly send the stock higher.
Therefore, it's unlikely the stock will get significantly cheaper from its current levels. So, if investors are interested in SoundHound stock, they should remember that it probably will be very volatile. Additionally, with the company being essentially a long shot, investors should only devote a portion of their portfolio that they are willing to lose to the stock.
If I were investing in SoundHound, this would be around 1% of my portfolio, but your risk tolerance and confidence level may vary. Should SoundHound AI become the definitive leader in this area, I have no doubt that the stock will rocket higher. However, there is plenty of competition, and SoundHound will have its work cut out for it.
