Many investors look for small-cap stocks that have the potential to dominate their niche because their small size prevents them from being significantly owned by large companies. Furthermore, due to their small size, investors will benefit greatly if they see significant growth since they started from a small starting point.
Combine the potential of small caps with an explosive industry like artificial intelligence (AI) and you have a recipe for an investment that can be incredibly profitable. A fairly popular AI stock is SoundHound AI (NASDAQ: SOUND). At a recent valuation of $1.8 billion, this is slightly below the historic small cap threshold of $2 billion.
However, an advantage of investing in small caps is that the shares are relatively unknown. SoundHound is already quite popular, but does that leave room for profit?
SoundHound’s technology is finding acceptance in two industries
SoundHound AI does exactly what the name suggests. It offers AI solutions for every product related to sound. SoundHound’s products excel in two niches: restaurants and automotive.
The restaurant industry is working to automate drive-thru and phone orders so that restaurants don’t need staff to perform these tasks. This offers enormous cost-saving potential for restaurants. Companies like Jersey Mike’s Subs and White Castle are implementing these technologies, and they are becoming increasingly mainstream.
Another area where SoundHound products are used is the automotive sector. Digital assistants in vehicles have not been very useful for years and are a feature that few people use. However, with SoundHound’s technology, they have become more responsive and are even integrating with major language models, such as ChatGPT, in countries like Japan.
One problem with this technology is that it requires connection to the internet, which is not always available while traveling. As a result, Nvidia worked with SoundHound to implement its technology on its vehicle-specific GPU so this isn’t an issue.
This partnership also created a frenzy for SoundHound stock, as Nvidia owns approximately 1.73 million shares of SoundHound. If one of the top AI investments owns part of another AI company, the market will likely take notice.
Is SoundHound no longer an unknown small cap stock? Is it still worth buying?
SoundHound is not a surefire investment
SoundHound is growing at a healthy pace, with fourth quarter revenue of $17.1 million, indicating 80% year-over-year growth. What investors are most excited about, however, is SoundHound’s backlog. The revenue backlog grew to a whopping $661 million, indicating a huge amount of business in the pipeline.
However, this is not guaranteed revenue as it is not clear when it will be recognized.
Moreover, the AI ​​space is full of competition. It wouldn’t take much for an AI giant like Alphabet or Microsoft to task a small portion of his company with developing a solution to rival SoundHound’s and likely bankrupt the company. For example, OpenAI (in partnership with Microsoft) already has the technology to perform real-time translations. If it can do that, it can probably understand someone ordering at a restaurant or asking for a digital assistant in a car.
Furthermore, SoundHound’s operations are far from profitable. The company posted an operating loss of $12.4 million, or a loss margin of about 73%. Such losses cannot continue forever, especially when there is only $100 million in the bank.
While many small-cap stocks fly under the radar, giving them attractive valuations, SoundHound’s stock is quite expensive.
With 27x sales, the stock already has quite a bit of success baked into its price.
As a result, I think I’ll pass on SoundHound stock for now. But if you’re still interested, consider this investment more like a lottery ticket. It may or may not work out, so your expectations should be set accordingly. This investment could go to zero if an AI giant like Alphabet or Microsoft decides to enter this field.
Should you invest $1,000 in SoundHound AI now?
Consider the following before purchasing shares in SoundHound AI:
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Keithen Drury has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
1 Small-Cap Artificial Intelligence (AI) Stocks That Could Be a Monster Winner originally published by The Motley Fool
