In new and exciting fields like artificial intelligence (AI), it can be difficult to separate the good from the bad. From investment advisors to the companies themselves, there has been a slew of investigations and probes so far in 2024 scrutinizing the claims and promises of various AI tech players.
For example, Nvidia received a federal subpoena, Alphabet is facing antitrust litigation, and whistleblowers are pressuring the SEC to investigate OpenAI. These probes might not change the fundamentals of those companies, but some investors would rather not have to worry about such a risk.
But not every business in this hot niche is under fire -- and one in particular looks like an extremely attractive investment prospect. There are risks to buying into this smaller company, but also considerable upside potential.
NASDAQ: SOUN
Key Data Points
This cheap AI stock is exposed to several industries
Relatively few investors have heard of SoundHound AI (SOUN +4.93%). The company has a market cap of only $1.7 billion. But if it gets its way, it'll be making plenty of noise over the next few years because it's in the right place at the right time.
As its name suggests, SoundHound is involved in the sound business. Specifically, it has developed voice AI and speech recognition that can be useful in a host of places, from vehicles to drive-thrus.
Management claims its technology is "best-in-class...surpassing competitors in speed, accuracy, and complex language understanding." Its growing customer base is a testament to these claims.
SoundHound has a deep portfolio of patented AI technologies and a long list of pilot customers. In recent years, it has signed automakers like Dodge and Honda, which will use its voice software to augment the experience of their drivers. Stellantis -- which owns the Fiat and Jeep marques, among many others -- recently signed a deal with SoundHound that will allow its drivers to chat with their cars about maintenance issues. The company has also signed agreements with several restaurant operators, including Applebee's and White Castle, aiming to make their drive-thrus more efficient.
SoundHound has an impressive technology portfolio. And it's signing customers across a variety of industries, accruing credibility just as the AI revolution is taking off. While shares are expensive at 24 times sales, the company's diminutive size and quickly growing revenue base mostly justify the valuation. If management can execute, it could be the next blue chip AI stock.
SOUN PS Ratio data by YCharts.
Before you buy SoundHound stock, understand these issues
SoundHound seemingly has the right technology at the right time. And unlike some other AI companies, it's not under any major investigations from regulators. But that doesn't mean the company is free of flaws.
While the company's rising revenue base and growing customer list -- not to mention a $3.7 million direct investment by AI chipmaker Nvidia -- work in SoundHound's favor, it's far from certain that the company will be a winner in the competitive AI space. Tech giants, including Alphabet and IBM, are developing their own solutions, and it's possible that SoundHound's $60 million annual research and development budget won't be enough to keep its technology competitive over the long term.
According to The Washington Post, "the investments in AI represent some of the largest infusions of cash in a specific technology in Silicon Valley history." Google, IBM, and other tech giants like Microsoft are spending tens of billions of dollars per quarter building out AI infrastructure, and it's not yet clear how differentiated SoundHound's platform is against competing models like Google's Gemini or OpenAI's ChatGPT, which Microsoft has backed.
SoundHound is carefully choosing its end markets and developing expertise in niches like restaurant drive-thrus and in-vehicle communications. Its growing customer list lends it a reputation, as well as a growing trove of real-world data to further refine its AI models.
However, it's hard to imagine big tech ignoring these opportunities for long. In the coming years, competition will grow immensely. That could relegate SoundHound to the niche use cases it's already carved out. It could also push out the company's technology altogether. If it comes down to who can spend the most to accelerate its AI platform the fastest, SoundHound likely doesn't stand a chance versus its deep-pocketed competitors.
Still, SoundHound remains a promising pick for risk-tolerant growth investors. If the company fails, shareholders will lose everything. But if it succeeds, it's not hard to imagine that its shares could grow to several times their current value, especially given the company's market cap of under $2 billion.
Investors seeking maximum growth potential should examine SoundHound closely, but most investors should watch this company from the sidelines.
