In February, Nvidia (-4.08%) unveiled its inaugural 13-F filing, showcasing its acquisition of several stocks in the last quarter of 2023. Each of these stocks is linked to the artificial intelligence (AI) sector, presenting Nvidia with an opportunity to derive value from the AI landscape beyond its primary semiconductor business.
Among its investments, Nvidia acquired 1.7 million shares of SoundHound AI (-2.90%), which were valued at $3.6 million by the close of 2023. With SoundHound’s stock now trading at $4.50, Nvidia’s stake has appreciated to approximately $7.8 million, reflecting an impressive gain of 116% in under a year.
SoundHound is a leader in the field of conversational AI, boasting an extensive clientele. The company is experiencing rapid revenue growth, and its management has a highly optimistic outlook for the future. This raises the question: should investors follow Nvidia’s lead and invest in this stock?
Pioneering conversational AI
SoundHound has crafted a range of conversational AI solutions tailored for the hospitality, automotive, and food service sectors. These tools are designed to understand and respond to voice inputs, allowing users to harness the capabilities of AI without typing a word.
In the restaurant industry, SoundHound AI facilitates autonomous order-taking in drive-thrus and stores, alleviating employee workloads. Beef ‘O’ Brady’s, a family sports bar and grill chain, has implemented SoundHound’s AI ordering system across all its corporate locations, offering franchisees the option to do the same.
Numerous restaurants also employ SoundHound’s Employee Assist software, which is custom-tailored for each location, providing staff with information on menus, internal policies, and more. Notable restaurant clients include Chipotle, Krispy Kreme, and Five Guys.
In the automotive sector, SoundHound’s Chat AI voice assistant is now operational across six Stellantis brands, such as Peugeot and Alfa Romeo. It offers drivers information on various topics, from weather updates to sports scores and flight statuses. Additionally, SoundHound’s AI Vehicle Intelligence product is familiar with each vehicle’s manual, enabling drivers to readily access details about its features.
In early August, SoundHound announced its acquisition of Amelia, an AI enterprise that aids businesses in creating and deploying virtual agents for customer and employee service. This merger will extend SoundHound’s reach to hundreds of clients and broaden its presence in industries like healthcare, insurance, and financial services.
SoundHound’s impressive growth trajectory
In the second quarter of 2024, SoundHound reported $13.5 million in revenue, marking a substantial 54% increase from the same period the previous year. This impressive performance, coupled with the Amelia acquisition, led management to revise its full-year forecasts for both 2024 and 2025.
The company now anticipates generating $80 million this year, reflecting a 74.3% increase from its 2023 figures, with expectations of at least $150 million in 2025 (including $45 million from Amelia), representing accelerated growth of 87.5%.
Furthermore, SoundHound concluded Q2 with a record $723 million in bookings, nearly double the previous year’s figure. These bookings represent the company’s order backlog, indicating a robust long-term revenue pipeline.
However, SoundHound’s financial performance raises concerns, as the company continues to heavily invest in growth at the cost of profitability, a strategy likely to persist until it achieves scale. This approach resulted in a $37.3 million net loss in Q2, a 60% increase from the previous year.
The company’s non-GAAP net loss—which excludes one-off and non-cash expenses like stock-based compensation—was somewhat better, amounting to $14.8 million, a slight improvement from $16 million in the prior-year quarter.
SoundHound ended Q2 with $200 million in cash on its balance sheet, enabling it to sustain losses in the near term. However, there is a risk that the company may need to raise capital before achieving consistent profitability, which could dilute existing investors.
Potential portfolio addition
Based on SoundHound’s trailing 12-month revenue of $55.4 million and a market capitalization of $1.6 billion, its stock is trading at a price-to-sales (P/S) ratio of 29.1, rendering it even pricier than Nvidia, which trades at a P/S multiple of 27.3. Given Nvidia’s leadership in the AI industry and its longstanding success, it seems unreasonable for SoundHound to command a premium valuation.
Nevertheless, SoundHound’s revenue growth is expected to outpace Nvidia’s in 2025, assuming management’s guidance holds true. With SoundHound’s projected $80 million in 2024 revenue, its stock is trading at a forward P/S ratio of 20.1, which drops further to 10.7 based on the company’s 2025 revenue forecast.
Therefore, investors willing to hold SoundHound stock for at least the next two years might find it a bargain at its current price. The long-term outlook appears even more promising as the company anticipates enterprise spending on AI to exceed $250 billion within the next three years.
It’s important to end on a crucial note. SoundHound is still in the nascent phase of monetizing its AI offerings, and the journey will not always be straightforward. Investors should consider keeping their positions modest to mitigate potential risks. After all, even Nvidia, a $2.6 trillion company, has not fully committed—it can easily absorb a $3.6 million loss should its investment in SoundHound not pan out.
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