Nvidia is undoubtedly the hottest stock in tech. All eyes are on its every move, so when it disclosed a hefty position in artificial intelligence (AI) company SoundHound AI (SOUN -0.82%) last February, shares of the small-cap stock rocketed up well over 50% in a day.
Even if some were hearing about it for the first time, SoundHound is far from a new company. It has been around since the mid-2000s when it was introduced as a music detection app, rivaling Shazam. It has more recently pivoted and is now a leader in AI-powered voice recognition.
The stock more than tripled to its peak in March and has since cooled after the company posted somewhat disappointing numbers. Its Q4 2023 revenue of $17.2 million missed estimates of $17.8 million, while it recorded a net loss per share of $0.07 versus the expected $0.06.
Despite the somewhat disappointing Q4, the company looks back on track after revealing its Q1 2024 numbers. Still, the stock is down 50% from its peak in March, so is now the time to jump in? Let's take a look at what the company has going for it and some of the challenges ahead.
NASDAQ: SOUN
Key Data Points
Relationships are key and SoundHound has some impressive friends
SoundHound has an impressive list of partners. First, the obvious one, Nvidia. You don't typically buy 1.7 million shares of a company unless you believe it has something special and can deliver. Of course, companies make investments that don't pan out all the time, but an endorsement from a company of Nvidia's caliber -- one that seems to have a crystal ball when it comes to AI -- is reason enough to take an interest.
More importantly, however, this relationship means integration of both companies' products and technologies. SoundHound's premiere product, Chat AI, will power voice and text interactions with Nvidia's DRIVE platform, Nvidia's solution for autonomous driving. Nvidia's success is SoundHound's.
Beyond Nvidia, SoundHound's technology is already used by major automotive companies like Honda, Kia, and Hyundai. It's used by tech companies like Square, Oracle, and Motorola. It's even used at White Castle to make ordering your burger that much easier. This isn't an exhaustive list, but the point is SoundHound has major players that want to play ball with it.
The tech is impressive
At the end of the day, SoundHound needs to deliver on its technology to succeed. Market-leading tech is what makes it unique. So what is special about it?
SoundHound's pitch is that voice interaction is the future. It is the most intuitive and natural way for humans to communicate. To this point, however, voice chatbots have been severely lagging. SoundHound claims its interactions are real-time and provide a much deeper contextual understanding of what is asked of it than you can experience with Siri or Alexa.
Remember the integration with Nvidia DRIVE? SoundHound just announced that it will be able to work offline, that is, not connected to the cloud. Nvidia's chips and SoundHound's technology will allow it to process locally in the car it's being used in. Normally, chatbots require a connection to the cloud. Now, if you lose service, it still works.
SoundHound has also built monetization directly into its services. This is a critical aspect. Users can be served ads related to the context of what they are doing. For example, suppose you hop in the car and ask for directions home. It's 7 p.m. Your car shows you the way home and then asks if you're hungry. You say yes and that pizza sounds good. Your car then tells you Little Caesar's is running a special.
This is what led to massive success for Alphabet's Google. It became the primary way in which people interacted with the internet, therefore it was in a position to sell the most valuable ad space. Now we expect ads when we go online, it is just a part of life. If more and more interactions are mediated by voice, that becomes premium ad real estate.
Some major barriers stand in its way
The elephant in the room is the rest of Big Tech. The likes of Google, Apple, and Amazon have been developing their own voice technology. They are undoubtedly working to integrate their existing tech with advancements in AI. It is a long shot that given time and big tech's incredible resources, they don't develop something comparable in technical ability to SoundHound's products.
This wouldn't mean the end for SoundHound by any means, but it puts a pretty significant cap on the total market it can go after, as well as potentially introducing some pretty stiff competition in the markets it is already succeeding in.
A possible upside of one of these companies developing a product that matches SoundHound's is that it could force a buyout of SoundHound at a premium. If Google, say, feels left behind by Apple (or vice versa), it could look to scoop up SoundHound or agree to license its tech for a pretty penny.
