Nvidia(NASDAQ: NVDA) is one of the largest companies in the world. Its market cap stands at $3.3 trillion at the time of writing, with $3 trillion of that value added in the last two years alone.
Nvidia’s data center graphics processing units (GPUs) are the gold standard for developing artificial intelligence (AI) models, and they are the main proponent of the company’s incredible growth. Over the past year, CEO Jensen Huang has spread some of Nvidia’s good fortune by investing in other AI stocks.
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Image source: Nvidia.
Nvidia started investing in AI stocks in late 2023. According to its latest 13-F filing with the Securities and Exchange Commission, which was released a few weeks ago, it now owns six:
Applied Digital Corpthat builds data centers for customers.
Arm positionsthat helps semiconductor companies design advanced computer chips.
Nano-X imagingthat develops AI software to improve the efficiency of medical imaging.
Recursion pharmaceutical productsthat uses AI to transform the drug discovery process.
SoundHound AI(NASDAQ: SOUND)which is a leader in conversational AI technologies.
Arm Holdings received the largest investment, with a position from Nvidia worth $280 million at the end of the third quarter of 2024 (ended September 30). That represents more than half the value of Nvidia’s entire portfolio.
Arm shares are up about 77% since Nvidia bought it, but that doesn’t detract from the 271% return generated by SoundHound AI. Nvidia’s position in SoundHound is relatively small, worth just $13.6 million based on the current share price of $7.88, but that clearly isn’t stopping investors from rushing to buy it.
Most popular generative AI chatbot applications perform best when users enter text-based prompts, but SoundHound is leading the way in conversational AI, which can understand spoken prompts and respond in kind.
SoundHound’s software is primarily used in the automotive, hospitality and quick service restaurant 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 and more.
Auto giants love Mercedes Benz And Stellantis (home of Jeep, Dodge and Chrysler) are two top customers of SoundHound’s software. The Chat AI product allows these brands to install an AI voice assistant in their vehicles so drivers can instantly request information about the weather, the stock market and even the status of their flight on the way to the airport.
Drivers can also say goodbye to physical manuals, because SoundHound’s Vehicle Intelligence software knows everything about the features and functions in their car, and can retrieve them at any time.
In the restaurant industry, popular chains such as 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 has also developed a product called Employee Assist, which employees can call on at any time if they need information about store policies or menu items.
SoundHound generated record revenue of $25.1 million in the third quarter of 2024, up 89% from the same period a year ago. SoundHound took a share of Amelia’s revenue for the first time, which helped fuel that 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 there are now six different industries representing between 5% and 25% of total revenue. That’s one of the main reasons why SoundHound has significantly increased its expectations for 2024 and 2025.
It now expects to deliver between $82 million and $85 million this year (compared to the previous forecast of $80 million), which would be an increase of 82% compared to 2023 at the mid-range.
The company then expects to generate between $155 million and $175 million in revenue in 2025 (compared to the previous forecast of $150 million), indicating accelerated growth of 97% at the mid-range.
But it gets better. SoundHound told investors it has an order backlog of more than $1 billion, which it expects to convert into revenue over the next six years.
SoundHound is losing quite a bit of money. Under Generally Accepted Accounting Principles (GAAP), Q3 brought in $21.7 million (remember, this was only $25.1 million in revenue). The company only has $136 million in cash on hand, so it can’t afford to lose money at this rate for long.
SoundHound recently announced a new at-the-market equity facility that will allow it to raise an additional $120 million by issuing more shares. It will help secure the company’s future, but it will also dilute existing shareholders, which could translate into losses for investors who buy the shares today.
Based on SoundHound’s trailing-twelve-month revenue and current market cap of $3.2 billion, the stock trades at a price-to-sales ratio (P/S) of 37.5. That makes it even more expensive than Nvidia! That doesn’t make much sense, considering Nvidia has a decades-long track record of success, plus a strong balance sheet, rising financials, and the best AI chips in the world:
SOUN PS Ratio data by YCharts
SoundHound’s revenue forecast for 2025 makes the stock look much cheaper in the long term. However, it is still a highly speculative way to invest in the AI industry, so it is important to only bet money you can afford to lose.
After all, Nvidia is a $3.3 trillion company, so it’s probably not worried about losing the $13.6 million it currently has invested in SoundHound stock if things don’t work out.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, Nvidia, and Serve Robotics. The Motley Fool recommends Stellantis and recommends the following options: Short December 2024 puts $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Nvidia bought six artificial intelligence (AI) stocks, but this one rose the most, originally published by The Motley Fool
