Nvidia(NASDAQ: NVDA) is one of the world’s largest companies. Its market capitalization stands at $3.3 trillion as of this writing, with $3 trillion of that value added in the last two years alone.
Nvidia’s graphics processing units (GPUs) for the data center are the gold standard for developing artificial intelligence (AI) models, and they are the main proponent behind the company’s incredible growth. Over the past year, CEO Jensen Huang has spread some of Nvidia’s good fortune by investing in other AI stocks.
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Image source: Nvidia.
Nvidia started investing in AI stocks at the end of 2023. According to its latest 13-F filing with the Securities and Exchange Commission, which was released a few weeks ago, it now owns six of them:
Applied Digital Corp, which builds data centers for customers.
Arm Holdings, which helps semiconductor companies design advanced computing chips.
Nano-X Imaging, which develops AI software to improve the efficiency of medical imaging.
Recursion Pharmaceuticals, which is using AI to transform the drug discovery process.
Serve Robotics, which develops autonomous delivery robots.
SoundHound AI(NASDAQ: SOUN), which is a leader in conversational AI technologies.
Arm Holdings received the largest investment, with Nvidia’s position worth $280 million at the end of the third quarter of 2024 (ended Sept. 30). That represents over half of the value of Nvidia’s entire portfolio.
Arm stock is up around 77% since Nvidia bought it, but that doesn’t hold a candle to the 271% return generated by SoundHound AI. Nvidia’s position in SoundHound is relatively small, with a value of just $13.6 million based on its current stock price of $7.88, but that clearly hasn’t stopped investors from rushing to buy it.
So, is it too late to follow Nvidia’s lead?
Most popular generative AI chatbot applications perform best when users input text-based prompts, but SoundHound is a leader in conversational AI, which can understand voice prompts and respond in kind.
SoundHound’s software is primarily used in the automotive, hospitality, and quick-service restaurant industries. However, it acquired Amelia a few months ago, which is another company specializing in conversational AI. It helps organizations create AI-powered virtual agents to serve their customers and employees, and the deal is helping SoundHound expand into other industries like financial services, insurance, healthcare, and more.
Automotive giants like Mercedes-Benz and Stellantis (home to Jeep, Dodge, and Chrysler) are two top customers of SoundHound’s software. Its Chat AI product allows those brands to install an AI voice assistant in their vehicles, so drivers can instantly request information on the weather, the stock market, and even the status of their flight on the way to the airport.
Drivers can also say goodbye to physical instruction manuals because SoundHound’s Vehicle Intelligence software knows everything about the features and functions in their car, and they can request it at any moment.
In the restaurant industry, popular chains like Chipotle, Krispy Kreme, and Papa John’s use SoundHound’s software. The company offers an AI ordering system that can be used to accept phone orders, in-store orders, and even drive-thru orders without human intervention. It also developed a product called Employee Assist, which workers can call upon at any time if they need information about store policies or menu items.
SoundHound generated a record $25.1 million in revenue during the third quarter of 2024, which was a whopping 89% increase from the year-ago period. SoundHound included some of Amelia’s revenue for the first time, which helped drive that growth.
The acquisition added other benefits like customer diversification; 90% of SoundHound’s revenue came from the automotive industry in the third quarter of last year, whereas it now has six different industries accounting for between 5% and 25% of its total revenue. That’s one of the main reasons SoundHound just significantly increased its guidance for 2024 and 2025.
It now expects to deliver between $82 million and $85 million this year (compared to its previous forecast of $80 million), which would be an 82% increase compared to 2023 at the midpoint of the range.
The company then expects to generate between $155 million and $175 million in revenue in 2025 (compared to its previous forecast of $150 million), which points to accelerated growth of 97% at the midpoint of the range.
But it gets better. SoundHound told investors it has an order backlog of more than $1 billion, which it expects to convert into revenue over the next six years.
SoundHound is losing quite a bit of money. It burned through $21.7 million on a generally accepted accounting principles (GAAP) basis during the third quarter (remember, that was on just $25.1 million in revenue). The company only has $136 million in cash on hand, so it can’t afford to lose money at this pace for very long.
In fact, SoundHound recently announced a new at-the-market equity facility that will allow it to raise an additional $120 million by issuing more stock. It will help secure the company’s future, but it will also dilute existing shareholders, which could translate into losses for investors who buy the stock today.
Based on SoundHound’s trailing-12-month revenue and its current market capitalization of $3.2 billion, its stock trades at a price-to-sales (P/S) ratio of 37.5. That makes it even more expensive than Nvidia! That doesn’t make a whole lot of sense, considering that Nvidia has a decades-long track record of success, plus a fortress balance sheet, surging financial results, and the best AI chips in the world:
SoundHound’s revenue forecast for 2025 makes the stock appear much cheaper on a forward basis. However, it’s still a very speculative way to invest in the AI industry, so it’s important to only put in money you can afford to lose.
After all, Nvidia is a $3.3 trillion company, so it probably isn’t concerned about losing the $13.6 million it currently has invested in SoundHound stock if things don’t work out.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Serve Robotics. The Motley Fool recommends Stellantis and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
