In the space of just 18 months, Nvidia's (NVDA -0.79%) market capitalization has grown from $360 billion to over $2.2 trillion, making it the third largest company in the world behind Apple and Microsoft.
Artificial intelligence (AI) is responsible for the majority of that value creation. Nvidia designs the world's most powerful graphics processing units (GPUs) for data centers, which developers use to build, train, and deploy their AI models.
Those chips sent Nvidia's data center revenue soaring 217% during fiscal 2024 (ended Jan. 28, 2024), and that momentum should continue in fiscal 2025.
The AI opportunity is rapidly expanding, and Nvidia is using some of its wealth to invest in other companies in the industry.
Nvidia's headquarters in Santa Clara, California. Image source: Nvidia.
Nvidia bought a handful of AI stocks at the end of 2023
Nvidia filed a 13F with the Securities and Exchange Commission on Feb. 14 revealing new holdings in five different stocks:
- Arm Holdings, which designs processors for the world's largest chip companies. Nvidia invested approximately $147 million in this stock, which was more than it invested in the other four combined.
- Recursion Pharmaceuticals, which uses AI to accelerate the drug discovery process.
- Nano-X Imaging, which uses the technology to enhance medical imaging to improve patient outcomes.
- TuSimple Holdings, a developer of autonomous driving technologies for the trucking industry.
- SoundHound AI (SOUN 3.48%), a specialist in conversational AI technologies.
Despite Arm being Nvidia's largest position, SoundHound AI takes the cake for best performer. It's up 160% in 2024 so far, which means Nvidia has more than doubled its money since buying it in the fourth quarter of last year.
At SoundHound's current stock price of $5.50, Nvidia's position is worth around $9 million. While that doesn't sound like a big number, SoundHound is only a $1.8 billion company. But it's packed with potential, so should investors follow Nvidia's lead?
A conversational AI specialist
AI went mainstream in 2023 with applications like ChatGPT, which allowed users to enter text-based prompts to instantly generate text, images, videos, and computer code. SoundHound specializes in conversational AI, which uses voice recognition to create a number of useful business applications.
Restaurant chains like Applebee's, Chipotle, and Krispy Kreme use its technology to take customer orders in-store, over the phone, and in the drive-thru at a growing number of their locations, which reduces the workload on employees.
And SoundHound's Employee Assist tool allows workers to hold conversations with an AI virtual assistant, which is available to answer questions at a moment's notice whether it relates to in-store policies or instructions for making menu items.
The company's technology is also powering the voice assistants in a growing number of new cars, from manufacturers including Mercedes-Benz, Hyundai, and Stellantis (which owns Chrysler, Jeep, and Dodge). The Vehicle Intelligence application can walk drivers through their car's features, and the Chat AI application can answer general questions about the weather, sports scores, and nearby attractions.
SoundHound also has a deal with Nvidia Drive, which is an end-to-end autonomous vehicle platform for car manufacturers. Nvidia is using SoundHound to create a powerful voice assistant that doesn't require internet connectivity, making it far more private because data isn't exposed externally.
SoundHound generates little revenue, but it's growing quickly
SoundHound AI generated $11.6 million in revenue during the first quarter of 2024 (ended March 31), and while that's a relatively small number, it was a 73% increase from the year-ago period.
The company also issued a modest increase to its forecast for the full year, and it now expects to deliver a record-high $71 million in total revenue. That would represent year-over-year growth of 55%, an acceleration from the 47% growth it delivered in 2023.
It also shored up its long-term revenue-earning potential, with an order backlog worth $682 million at the end of the first quarter -- an 80% increase from the year-ago period. This backlog is expected to convert into revenue over a period of seven years, on average, and in as little as four years for some subscription-based customers.
However, Chief Financial Officer Nitesh Sharan says the backlog figure only factors in deals that have a reasonable chance to convert into revenue based on the facts at hand today, and not the potential opportunities in the pipeline. For example, he recently told investors the company has over 100,000 store locations in its sales pipeline, which aren't in the backlog data.
While this growth is impressive, the company is in the scale-up phase, which requires significant capital investment. As a result, it lost over $33 million at the bottom line in the first quarter. That was 20% larger than its loss from the same quarter last year, despite generating significantly more revenue now.
Despite Nvidia's presence, SoundHound stock is a speculative bet
SoundHound only had $226 million in cash on hand at the end of the quarter, so it can't sustain its growing losses indefinitely. It entered a new at-the-market facility during that period, which will allow management to sell new shares to investors to raise money when appropriate. But only time will tell whether that will be enough to see the company through to profitability.
On a positive note, management believes it could generate a profit during 2025 on the basis of adjusted earnings before interest, tax, depreciation, and amortization (EBITDA). However, that is far from a sure thing, and in my opinion, investors are paying a hefty price relative to the risk at hand.
Based on the company's $50.8 million in trailing 12-month revenue and its market cap of $1.8 billion, its stock trades at a price-to-sales (P/S) ratio of 35. By comparison, Nvidia trades at a P/S of 36, but it's growing its revenue even more quickly than SoundHound, and the company is highly profitable. Microsoft, which is a leader in AI software, trades at a P/S of just 13.6.
So, should investors buy SoundHoundAI just because Nvidia did? At the current price, it's a tough recommendation. Besides, Nvidia's stake is only worth $9 million -- if it went to zero, the $2.2 trillion chip giant wouldn't even flinch.
Therefore, buying the stock should be reserved for investors with a very high risk tolerance. Otherwise, it might be best to wait on the sidelines for a better price, or until the company proves it can turn a profit.
