In just 18 months Nvidia'S (NASDAQ: NVDA) Its market capitalization has grown from $360 billion to over $2.2 trillion, making it the third largest company in the world after Apple And Microsoft.
Artificial intelligence (AI) is responsible for most 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 helped Nvidia's data center revenues rise 217% in fiscal 2024 (ending January 28, 2024), and that momentum should continue into fiscal 2025.
The opportunities for AI are expanding rapidly, and Nvidia is using some of its wealth to invest in other companies in the sector.
Nvidia bought a handful of AI stocks in late 2023
Nvidia filed a 13F with the Securities and Exchange Commission on February 14, revealing new positions in five different stocks:
-
Arm positions, which designs processors for the world's largest chip companies. Nvidia invested about $147 million in this stock, which was more than it invested in the other four combined.
-
Recursion pharmaceutical productsthat uses AI to accelerate the drug discovery process.
-
Nano-X imagingthat uses technology to enhance medical imaging to improve patient outcomes.
-
TuSimple Holdingsa developer of autonomous driving technologies for the trucking industry.
-
SoundHound AI (NASDAQ: SOUND)a specialist in conversational AI technologies.
Despite Arm being Nvidia's largest position, SoundHound AI takes the cake for best performance. It's up 160% so far in 2024, meaning Nvidia has more than doubled its cash since purchasing it in the fourth quarter of last year.
At SoundHound's current share price of $5.50, Nvidia's position is worth about $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 became 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, using speech recognition to create a number of useful business applications.
Restaurant chains such as Applebee's, ChipotleAnd 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, reducing the workload for employees.
And with SoundHound's Employee Assist tool, employees can have conversations with a AI virtual assistant, available to answer questions at a moment's notice, whether about in-store policies or instructions for creating menu items.
The company's technology also powers the voice assistants in a growing number of new cars, including from manufacturers Mercedes Benz, HyundaiAnd Stellantis (which owns Chrysler, Jeep and Dodge). The Vehicle Intelligence application can guide drivers through their car's functions, 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, an end-to-end autonomous vehicle platform for automakers. Nvidia uses SoundHound to create a powerful voice assistant that doesn't require an internet connection, making it much more private as data isn't exposed externally.
SoundHound generates little turnover, but is growing quickly
SoundHound AI generated $11.6 million in revenue during the first quarter of 2024 (ending March 31), and while that's a relatively small number, it was a 73% increase from the year-ago period.
The company also modestly raised its full-year forecast and now expects to achieve record-high total revenue of $71 million. That would mean annual growth of 55%, an acceleration from 47% growth in 2023.
It also strengthened its long-term revenue potential, with an order book worth $682 million at the end of the first quarter – an increase of 80% from the same period a year ago. This backlog is expected to convert to revenue over an average of seven years, and for some subscription-based customers in as little as four years.
However, Chief Financial Officer Nitesh Sharan says the backlog figure only affects deals that have a reasonable chance of converting to revenue based on current facts, and not the potential opportunities in the pipeline. For example, he recently told investors that the company has more than 100,000 retail locations in its sales pipeline that are not reflected 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, the company lost more than $33 million on the bottom line in the first quarter. That was 20% bigger than the loss in the same quarter last year, despite now generating significantly more revenue.
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 mounting losses indefinitely. During that period, the company entered into a new at-the-market facility, which will allow management to sell new shares to investors to raise cash if necessary. But only time will tell if that will be enough to make the company profitable.
On the plus side, management believes it could generate profits in 2025 on an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) basis. However, that is far from certain, and in my opinion investors are paying a high price in relation to the risk they are taking.
Based on its $50.8 million in revenue over the last twelve months and its market cap of $1.8 billion, the stock trades at a price-to-sales ratio (P/S) of 35. For comparison, Nvidia trades at a P/ S of 36, but its revenue is growing even faster than SoundHound, and the company is very profitable. Microsoft, a leader in AI software, trades at a P/S of just 13.6.
Should investors buy SoundHoundAI just because Nvidia did? At the current price, it's a tough recommendation. Furthermore, 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.
Should you invest $1,000 in SoundHound AI now?
Consider the following before purchasing shares in SoundHound AI:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and SoundHound AI wasn't one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $553,880!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 13, 2024
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Chipotle Mexican Grill, Microsoft, and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: long January 2026 $395 calls at Microsoft and short January 2026 $405 calls at Microsoft. The Motley Fool has one disclosure policy.
Nvidia recently bought five artificial intelligence (AI) stocks, and one of them is definitely on the rise was originally published by The Motley Fool
