Nvidia’s graphics processing units (GPUs) for data centers set the benchmark for developing artificial intelligence (AI) models, and they are the primary driver of the company’s incredible growth. Over the past year, CEO Jensen Huang has shared some of Nvidia’s good fortune by investing in other AI stocks.
Arm Holdings received the largest investment, with Nvidia’s position worth $280 million at the end of the third quarter of 2024 (ending September 30). This represents more than half the value of Nvidia’s entire portfolio.
Arm stock is up about 77% since Nvidia bought it, but that doesn’t hold up against the 271% return generated by SoundHound AI. Nvidia’s position in SoundHound is relatively small, worth just $13.6 million based on the current stock price of $7.88, but that clearly hasn’t stopped investors from rushing in. to buy it.
Most popular generative AI chatbot apps work best when users enter text 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 fast food industries. However, a few months ago it acquired Amelia, another company specializing in conversational AI. It helps organizations create AI-powered virtual agents to serve their customers and employees, and the deal helps SoundHound expand into other industries such as financial services, insurance, healthcare, etc.
Automotive giants like Mercedes-Benz And Stellantis (home to Jeep, Dodge and Chrysler) are two main customers of SoundHound software. Its Chat AI product allows these brands to install an AI voice assistant in their vehicles, so drivers can instantly request information about the weather, stocks and even the status of their flight en route to the airport.
Drivers can also say goodbye to physical instruction manuals, because SoundHound’s Vehicle Intelligence software knows everything about their car’s features and functions, and they can ask for it at any time.
In the restaurant industry, popular chains like Chipotle, Krispy KremeAnd Papa John’s use SoundHound 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 on 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, a whopping 89% increase from last year. SoundHound included a portion of Amelia’s revenue for the first time, helping to drive this growth.
The acquisition added other benefits such as customer diversification; 90% of SoundHound’s revenue came from the automotive industry in the third quarter of last year, while it now has six different sectors accounting for between 5% and 25% of its total revenue. This is one of the main reasons why SoundHound significantly increased its 2024 and 2025 forecasts.
It now plans to provide between $82 million and $85 million this year (up from its previous forecast of $80 million), which would represent an 82% increase from 2023, halfway through the range.
The company then expects to generate between $155 million and $175 million in revenue in 2025 (up from its previous forecast of $150 million), which suggests accelerated growth of 97% in the middle of the range .
But it’s getting better. SoundHound told investors it has an order backlog of more than $1 billion, which it hopes to convert into revenue over the next six years.
SoundHound is losing a lot of money. It spent $21.7 million on a generally accepted accounting principles (GAAP) basis during the third quarter (remember, that represented revenue of just $25.1 million). The company only has $136 million in cash, so it can’t afford to lose money at this rate for very long.
In fact, SoundHound recently announced a new market participation mechanism that will allow it to raise an additional $120 million by issuing more shares. This will help secure the company’s future, but it will also dilute existing shareholders, which could result in losses for investors who buy the stock today.
Based on SoundHound’s trailing 12-month revenue and current market cap of $3.2 billion, its shares trade at a price-to-sales (P/S) ratio of 37.5. This makes it even more expensive than Nvidia! This doesn’t make much sense, given that Nvidia has a decades-long track record of success, along with a fortress balance sheet, rising financial results, and the best AI chips in the world:
SoundHound’s revenue forecast for 2025 makes the stock appear much cheaper over time. However, this is still a very speculative way to invest in the AI sector. It is therefore important to only invest money that you can afford to lose.
After all, Nvidia is a $3.3 trillion companyso he’s probably not worried about losing the $13.6 million he 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 holds positions and recommends Chipotle Mexican Grill, Nvidia and Serve Robotics. The Motley Fool recommends Stellantis and recommends the following options: Short December 2024, $54 at Chipotle Mexican Grill. The Mad Motley has a disclosure policy.
Nvidia Bought 6 Artificial Intelligence (AI) Stocks, But This One Soared the Most was originally published by The Motley Fool
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