Nvidia‘S (NASDAQ: NVDA) stocks have been an absolutely incredible performer lately. Since the beginning of 2023, it has increased by more than 800%. Most investors would love to own a stock that delivers such returns, but not every company has the potential. It would take a huge growth catalyst to justify such gains.
SoundHound AI (NASDAQ: SOUND) is a company that could have this potential. It is a major player in a niche of the artificial intelligence (AI) sector and has a huge backlog in terms of its products.
SoundHound’s product is gaining momentum
SoundHound AI’s technology can parse human speech and perform various tasks based on what it hears. Its most common uses already include processing restaurant orders and improving in-vehicle digital assistants, but its capabilities extend far beyond those two use cases.
In the automotive segment, SoundHound collaborated with Stellantis; the giant automaker will integrate SoundHound’s technology into its vehicles across Europe and Japan. This gives people access to generative AI features while driving – an improvement over the voice assistants available on vehicles today. If SoundHound can win business with other automakers and break into other regions, this segment of its business alone could deliver tremendous growth.
SoundHound also worked with several companies in the restaurant industry to automate phone and drive-thru orders, saving restaurants on wages. According to the company, these AI assistants actually outperform humans in order speed and accuracy, so the customer doesn’t feel like the experience has been diminished. Some of SoundHound’s restaurant clients, including White Castle and Jersey Mike’s, are quite large, but there is serious room for growth if it can capture some of the largest fast-food companies.
SoundHound AI could achieve even greater success if its solutions are used in new applications.
But is that potential enough to make his stock the next Nvidia?
Nvidia has one important advantage that SoundHound does not
In the second quarter, SoundHound generated $13.5 million in revenue, up 54% year over year. That’s quite small compared to other AI companies.
The most important figure for investors to focus on, however, is SoundHound’s backlog, which totals $723 million. This figure has doubled from a year ago, demonstrating that rising demand has outpaced SoundHound’s ability to integrate its product with its customers’ systems.
This takes into account SoundHound’s current valuation, as Wall Street has high expectations for the company.
SoundHound shares trade at 23 times sales and already have a premium valuation. In contrast, Nvidia was trading at around 15 times forward earnings in early 2023. That was a dirt-cheap price, and also a far cry from the 47 forward earnings ratio it’s trading at today.
SoundHound already has a premium price tag, which detracts from its growth potential from here. But if it can grow into a company that generates $100 million in revenue per quarter, Nvidia-like performance for the stock is still possible.
If SoundHound achieved that and had a valuation of 20 times sales, it would be worth $8 billion, a 370% increase from its current market cap. That would be a solid return, but still far less than what Nvidia produced.
SoundHound stock’s premium price tag may keep it from delivering Nvidia-like returns from here, but that doesn’t mean it won’t be a great investment. However, it’s a bit of a gamble given the niche use cases for the product and the small size of the company. It could make investors a lot of money, but don’t expect Nvidia-like returns.
Should you invest $1,000 in SoundHound AI now?
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Keithen Drury has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
Could buying SoundHound AI now be like buying Nvidia in 2023? was originally published by The Motley Fool
