SoundHound AI (SOUN +2.19%) garnered a lot of attention after it was revealed that it was one of four stocks, along with Arm Holdings (ARM +2.10%), that Nvidia (NVDA +2.82%) invested in late last year. Nvidia took some of its ample cash and invested in companies it thought could greatly benefit from the upcoming artificial intelligence (AI) revolution.
Now there is a huge difference in size between SoundHound, which has a market cap of just over $1 billion, and Arm, which has a market cap of nearly $100 billion. Despite being just about one-hundredth of the size of Arm, SoundHound does share some intriguing similarities with the company.
A royalty revenue model
NASDAQ: SOUN
Key Data Points
One trait that helped lift Arm to where the company is today is its business model, which generates a lot of recurring revenue over long periods of time. The company licenses its technology to other companies getting upfront payments, but then collects royalties thereafter on every chip a customer ships based on its architecture. The model has proven to be so enduring that nearly half of Arm's royalty revenue comes from products that were introduced in 2012 or before.
SoundHound also derives much of its revenue from royalties. In fact, over 94% of its revenue in 2023 came from product royalties. With SoundHound's model, customers incorporate its voice AI platform into their devices, such as automobiles, third-party assistants, or smart TVs. SoundHound then collects royalty payments based on volume, usage, or life of the applicable product.
The company has also started to sell its platform via subscriptions for use cases that don't have a product attached to it. SoundHound has done a good job making inroads with its technology into the restaurant industry. Since there is no product attached to its technology in this industry, it sells its service as a subscription. This is also another recurring revenue stream, which helps add predictability to its business.
AI beneficiaries
Both Arm and SoundHound are also current beneficiaries of the AI revolution. Arm is seeing growth pick up as new end devices, such as smartphones, need more of its technology incorporated in central processing units (CPUs) to handle AI applications.
NASDAQ: ARM
Key Data Points
SoundHound, meanwhile, has seen its backlog grow as AI has quickly gone from being accepted to becoming expected. Its technology helps voice assistants and humans interact more naturally, as well as allows for more complex questions and answers.
The automobile industry has been one of the driving forces in embracing its platform; the company has relationships with more than 20 auto brands. The restaurant industry is quickly following suit with the company signing deals with restaurant chains as well as restaurant-focused fintech companies such as Toast and Olo.
Both Soundhound and Arm have teamed up with Nvidia. Arm's technology is being used in Nvidia's Grace Hopper Superchip, which combines CPUs with GPUs to help handle AI workloads more quickly while using less power. SoundHound, meanwhile, partnered with Nvidia to develop an in-vehicle voice platform running on the Nvidia Drive platform that doesn't need internet connectivity. Among the use cases for this technology will be retrieving information directly from a vehicle's user manual.
Image source: Getty Images.
SoundHound is in its early stages
SoundHound hasn't produced a lot of revenue yet, with the company reporting a 47% increase in revenue to $45.9 million for 2023. What it does have, though, is a large booking backlog of $661 million. These are signed contracts that if honored will turn into future revenue. The weighted average length of its contracts is about six and a half years, so that would average out to about $100 million in revenue per year just from currently signed contracts over that time. Some of this is back-end loaded, so don't expect $100 million in revenue next year, but it does set the company up for solid future revenue growth.
Meanwhile, as AI becomes more incorporated into everyday lives, more automobile manufacturers will look to add SoundHound's platform into their vehicles and more industries will look to use its technology. The company will also continue to innovate and offer new products.
That sets SoundHound up for strong potential growth in the years ahead. Now will SoundHound grow to the heights of Arm? That's a difficult task, but it is possible. Arm was able to get its CPU architecture into nearly every smartphone made. If SoundHound's AI voice technology can be incorporated into most smartphones, it can follow a similar path.
That said, SoundHound doesn't need to be the next Arm for an investment in the stock to be successful. If the company can continue to get wins in the auto and restaurant spaces and then perhaps capture some of the higher-end smartphone market, it will have a lot of long-term upside from here.
