Nvidia (NASDAQ: NVDA) is one of the top artificial intelligence (AI) companies right now. Its graphics processing units (GPUs) are vital to its creation, making it an excellent way to invest in AI.
But Nvidia's stock isn't the cheapest around, and many might worry about its future after its stellar performance in 2023 and so far in 2024. Because it has more than $100 million in investments in other companies, it has to disclose what they are. One of these is SoundHound AI (NASDAQ: SOUN), and it can be purchased for under $5 a share.
With SoundHound making the cut as one of Nvidia's top AI investments, is it a must-buy?
SoundHound's products are used in a wide range of industries
SoundHound's products are focused on anything dealing with verbal communication. With its class-leading products, its voice-recognition technology finds many uses, including in restaurants and the automotive industry.
For example, SoundHound and Jersey Mike's Subs worked together to create AI that takes phone orders. This is a significant improvement for Jersey Mike's: An employee no longer needs to answer the phone and take an order. Furthermore, it can receive multiple orders at once, so there are fewer chances for a potential customer to get impatient and go elsewhere.
On the automotive side, SoundHound has been working with multiple vehicle manufacturers to improve their digital-assistant technology. Many drivers don't employ this tech right now because the uses are fairly minimal, and it often results in mistakes. So SoundHound is working on integrating generative AI technology like ChatGPT into digital assistants, making them much more useful.
One downside is that it would require internet connectivity to function. SoundHound and Nvidia recognized this issue and teamed up to put SoundHound's technology on one of Nvidia's automotive GPUs so that connectivity isn't needed.
As generative AI products become more integrated into our lives, it's clear that verbal prompts will become a key part of that. With SoundHound's strong applications for AI, it should be a winner in this space, which is likely why Nvidia is invested in it.
SoundHound shows potential to be a massive force in the AI world
Although SoundHound is working with some big players in the industry, its revenue streams are still relatively small. In the fourth quarter, revenue rose 80% year over year, but only to $17 million. This isn't surprising since the company is still growing its product base.
Investors should also keep in mind its backlog, a measure of how much future revenue the company has under contract. With the backlog reaching $661 million at the end of the fourth quarter, it's sizable. While this revenue isn't guaranteed, it shows that some of the partnerships SoundHound has in the industry are set to become much larger in the future.
As you might expect from SoundHound's size, the company isn't profitable. An operating loss of $12.4 million in the fourth quarter shows it has a way to go before breaking even. A lack of profits is part of the risk when investing in early stage companies, something investors just need to take into account.
The stock also carries a premium valuation due to Nvidia's ownership stake, although that premium has decreased since it was first revealed.
SOUN PS ratio data by YCharts; PS = price to sales.
At 20 times sales, it isn't the cheapest price tag, but with how quickly SoundHound is growing and the opportunity in front of it, that's not surprising.
So, what should investors do if they're interested? Because SoundHound AI is a home-run stock, I'd keep my position fairly low (no more than 1%). That way, you'll still make a great profit if the stock explodes higher, but if it crashes to zero, the loss won't severely affect your portfolio.
SoundHound AI has the potential to be huge in AI, but other large players could also develop its technology. This makes it a high-risk, high-reward stock, and investors should position themselves accordingly.
Should you invest $1,000 in SoundHound AI right now?
Before you buy stock in SoundHound AI, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 22, 2024
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
