Few in the world of artificial intelligence (AI) investing would argue this point. Nvidia I’m on top of the world. But what many investors don’t know is that Nvidia is itself an investor.
Because Nvidia has investments totaling at least $100 million, it must disclose these holdings to the Securities and Exchange Commission (SEC) in its quarterly 13F filings.Five companies were included in that latest report, but the one I’m most interested in is SWoundhound AI (Thorn -8.08%).
SoundHound products are widely adopted
Nvidia’s investment in a particular AI player is a big deal, as innovators across the industry rely on its sophisticated chips. This means the company likely has more information than the general public about SoundHound’s superior capabilities, and investors should pay attention.
From the name, it’s clear that SoundHound AI uses audio and artificial intelligence to do something. Its products mainly focus on his two areas of restaurants and automobiles. However, the company’s audio products can easily be extended to other areas.
One example of its use in the automotive field is the integration of ChatGPT. Stellantis DS vehicle. This gives drivers an even more powerful digital assistant experience, with 50% of regular drivers saying they would use a digital assistant.
On the restaurant side, SoundHound recently announced a revamp of the phone ordering experience with Jersey Mike’s Subs. This fully automated experience allows you to process multiple orders at once with great precision, freeing up your employees to focus on other tasks instead of taking orders.
This type of automation is only going to become more popular, with a recent survey by SoundHound finding that 8 out of 10 customers believe this type of ordering will become the norm in the next few years.
SoundHound’s product rollout is still in its early stages, and growing awareness of its AI capabilities could lead to mass adoption soon.
But does that make the stock a buy?
SoundHound stock is very expensive
SoundHound is a relatively small company, with revenue of just $17 million in the fourth quarter of 2023 (up 80% year over year). However, it has a huge backlog, with $661 million of already signed contracts still pending. If SoundHound can pull off these deals, it could lead to impressive growth, so Nvidia may be investing in it.
The problem with cash-guzzling companies like SoundHound is that they’re in a race against time to turn a profit. The company ended 2023 with about $100 million in cash, but an operating loss of more than $68 million, and relied on financing and new equity to raise funds. Fortunately, management has managed its cash balances carefully and improved margins. SoundHound’s earnings per share (EPS) loss improved from $0.15 to $0.07. Also, given SoundHound’s success and large backlog, it shouldn’t have a problem raising additional capital if it needs more liquidity.
So far, SoundHound seems like a stock that could be a great investment. However, there is still one factor to consider. It’s valuation.
Buying the right stock at the wrong price can have disastrous consequences. SoundHound AI was an expensive stock at the beginning of the year, but its price skyrocketed after a strong quarterly report and Nvidia investment news.
SOUN PS ratio data by YCharts
At about 38 times sales, SoundHound’s stock is incredibly expensive, especially when other AI software stocks trade at between 10 and 20 times sales. But if SoundHound can grow its revenue from $17 million to $100 million per quarter within a few years, today’s stock price might not be too bad.
Everything depends on future execution, which is impossible to judge at this point. So what should investors do?
If you are interested in the company and believe it has a good chance of success, taking a small position (less than 1% of your portfolio) is not a bad idea. That way, if you fail, it won’t have a big impact on your portfolio. But if it’s successful, you’ll still get a big return.
SoundHound has a great product and great momentum, and that’s already priced into the stock price. Investing now means you have a lot of confidence in SoundHound due to its rising prices. As a result, I’m going to wait until the turmoil caused by his Nvidia investment subsides a bit before taking a position in SoundHound.
Keithen Drury has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
