Nvidia Makes Investment in SoundHound AI Stock – Is it a Good Move for Investors?

Nvidia Makes Investment in SoundHound AI Stock – Is it a Good Move for Investors?

Actions of AI SoundHound (NASDAQ:SON) have soared this year after Nvidia (NASDAQ:NVDA) revealed that it had purchased shares of the company. The chip giant made a relatively modest investment, spending nearly $3.7 million to take a 0.6% stake in the company. This investment was one of five investments Nvidia made in artificial intelligence (AI)-related technology companies in the fourth quarter of 2023.

So what exactly does SoundHound AI do and should investors follow in Nvidia’s footsteps and invest in the stock?

Carving out a niche in voice AI

Before Nvidia’s investment in the company was revealed, SoundHound AI wasn’t really known. However, the company has relationships with a number of major automakers that use its technology to power their voice assistant technologies. The company’s platform is integrated into devices such as automobiles, and its AI technology helps voice assistants interact with users in a more natural and conversational way.

The SoundHound AI platform, which it calls Houndify, achieves this in two main ways. First, it uses text-to-speech technology, which processes speech in real time so that the device understands its meaning before the user has even finished speaking. Then, it uses deep meaning understanding technology to help understand a user’s intent and answer complex questions.

An example of its technology at work would be a voice assistant capable of giving hotel recommendations when given a list of variables, such as location, price ranges, amenities and stars.

Nvidia Makes Investment in SoundHound AI Stock – Is it a Good Move for Investors?

Image source: Getty Images.

Advancing in the automotive and fast food sectors

The area where SoundHound AI has made the most progress in sales is the automotive industry. The company has relationships with more than 20 automotive brands, including Honda, Jeep, Hyundai, Fiat, Chrysler and RAM, among others. Alongside its fourth-quarter earnings report, the company announced that it won a deal with a major U.S. electric vehicle manufacturer and signed another contract with a major automaker to significantly increase its unit volumes through 2037.

The company has also made great strides in the fast food sector. Its voice assistant SoundHound for Restaurants will take phone orders so employees don’t have to answer calls and can instead focus on helping customers. It also offers solutions for drive-thrus and kiosks.

The company has signed deals with restaurant-focused fintech companies, such as Grill And Oloas well as fast food chains such as White Castle and Jersey Mike’s, among others.

SoundHound AI’s strength in the automotive and restaurant verticals has enabled it to increase its revenue by 47% in 2023 to $45.9 million. Meanwhile, for 2024, it projects revenue between $63 million and $77 million, representing growth of almost 53% at the midpoint. He said he hoped revenues would exceed $100 million in 2025.

While this is solid growth, more interesting is SoundHound AI’s cumulative subscription and reservation backlog of $661 million. This measure represents the potential revenue that the company expects to generate over the duration of its signed contracts. Currently, the average length of its backlog is six and a half years, so much of the revenue from these contracts is expected to be recognized before the end of 2031, although some contracts extend for longer.

A speculative investment

It’s easy to see why Nvidia likes SoundHound, with the company experiencing rapid growth and a large revenue backlog. It’s also not hard to imagine that SoundHound AI’s technology could be applied to other industries as well, potentially accelerating its growth.

The two companies also recently announced a collaboration where SoundHound AI will offer on-chip voice AI that does not require internet connectivity using Nvidia’s DRIVE platform. The solution will allow users to access SoundHound AI’s Vehicle Intelligence offering, where users can ask automotive-specific questions, such as what it means when a dashboard light is on, as well as general questions, such as finding the best place to eat nearby.

SOUN PS Ratio Chart (Forward)SOUN PS Ratio Chart (Forward)

SOUN PS Ratio Chart (Forward)

That said, with SoundHound shares trading at a price-to-sales ratio of over 26x and the company currently being unprofitable, the stock is very speculative at this point. Its technology looks impressive, but AI technology evolves rapidly. What might look like cutting-edge technology today could become a commodity in the future. While its cumulative backlog is impressive, that only equates to about $100 million in revenue per year over the average length of its contracts. So the company still has a long way to go to reach its current valuation.

As such, I recommend investors keep small positions if they want to follow Nvidia in SoundHound AI stock, as they should with Nvidia itself.

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Geoffrey Seiler has positions at Toast. The Motley Fool ranks and recommends Nvidia, Olo and Toast. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.

Nvidia invested in SoundHound AI stock, but should you? was originally published by The Motley Fool

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