I love Nvidia stock. Who wouldn't? Over the past year, shares have risen in value by more than 160%. Most of this rise can be attributed to rapid growth in demand for AI components. As the industry leader in graphics processing units (GPUs) -- a critical component for most AI infrastructures -- the company has seen demand skyrocket in recent years.
But Nvidia isn't the only company benefiting from the rise of AI. There's one significantly smaller business that is primed to benefit as well even if the market hasn't caught on yet.
NASDAQ: SOUN
Key Data Points
Bet on AI with this under-the-radar stock
Everyone's talking about AI these days. The fervor has sent the valuations of most AI businesses soaring. Yet some companies haven't seen their market caps surge as much as others. One relatively small AI business in particular has fallen under the radar. There are risks to investing in this business but also massive potential upside.
The company in question is none other than SoundHound AI (SOUN 4.08%). I wrote about this AI business a few months ago. Since then, shares have appreciated in value by more than 20%. But the latest bump in valuation could prove to be just the beginning.
As its name suggests, SoundHound AI is focused on AI applications related to sound. This will be one of the biggest ways everyday consumers engage with AI technologies. Whether it's asking your phone what song is currently playing or chatting with a customer-support agent that's actually a robot in disguise, the revolution has already begun. But interacting with AI using your voice is still in the very early innings. In a few years, we may be discussing all sorts of things with the help of an AI agent.
SoundHound, for example, has already implemented its technology across a handful of automaker brands, including Kia, Hyundai, and Jeep which allows drivers to discuss maintenance issues and other mechanical questions directly with the vehicle. SoundHound has also partnered with restaurants, including Applebee's and White Castle, to drive efficiencies and reduce costs at drive-thru windows through the use of voice AI agents.
In all, SoundHound has more than 200 patents related to its AI technology, covering everything from speech recognition to natural language processing. Management believes the company has the "most advanced independent voice AI platform on the market" -- a market it believes to be worth at least $140 billion in total. With a market capitalization under $2 billion, SoundHound stock looks like a terrific way to add massive growth potential to your portfolio.
But there are some risks investors must be aware of before diving in.
Understand these 2 things before investing in SoundHound
If SoundHound can capitalize on its growing customer list and prove its technologies across a variety of sectors and use cases, it will have a strong foothold in a market that should grow immensely over the next decade or more. In that scenario, the company will likely be worth far more than its current $1.7 billion valuation. But there are two risks that could derail this thesis.
SOUN Research and Development Expense (TTM) data by YCharts.
First, SoundHound has limited financing. It currently has just $200 million in cash and cash equivalents on its balance sheet. That compares to just $42 million in total liabilities, but the issue is that SoundHound is still losing money every quarter. Last quarter alone it posted a loss of around $40 million -- its biggest loss in years. To plug the gap, the company has been consistently diluting shareholders, something it will need to do if it plans on remaining solvent over the near term.
Limited financing leads to SoundHound's second challenge: a limited ability to ramp up research and development. Dozens of companies are investing heavily into their own voice AI technologies, including most of the big tech giants. SoundHound's relatively paltry annual research and development spending of $56 million -- a decrease from previous quarters -- will likely hamper its ability to compete long term. For SoundHound to win in this increasingly competitive space, it must find a way to greatly expand its access to capital, and thus ramp research and development spending. Even if it's successful at that, it will likely come at the cost of dilution for current shareholders.
Is there huge potential upside to SoundHound? Absolutely. And investors looking for maximum growth potential should consider this stock over large, more mature companies like Nvidia. But there are critical risks that could derail this story, too. Only investors willing to take on extra risk for extra upside should get involved.
