Is Nvidia's Investment a Massive Game-Changer for SoundHound AI?

Companies invest in other companies all the time with no fanfare. But heads turn when a company the size and stature of Nvidia (NVDA -0.49%) does it. This was the case when an Nvidia filing revealed a $3.7 million position in SoundHound AI (SOUN 19.30%). As you can see, the stock shot up overnight.

For perspective, SoundHound has a market cap of around $1 billion, so this investment is well under 1% of its market cap and almost nothing to Nvidia’s nearly $2 trillion market cap. But this wasn’t the only news. SoftBank Group, which invests in many successful tech companies (like Arm Holdings (ARM -5.64%), which you can read about here), purchased 1.1 million shares in fourth-quarter 2023. Neither of these investments breaks the bank, but they have investors asking: What exactly does this SoundHound company do, and is it an excellent investment?

What does SoundHound AI do?

The days of a person taking your order at fast-food restaurants are ending. Sure, humans will still be needed to oversee it, but voice recognition technology will do the heavy lifting. Automobiles are also advancing voice recognition and AI-powered virtual assistants. SoundHound’s tech allows people to communicate conversationally to make complex orders or queries. It’s incredible stuff.

As shown below, SoundHound’s software is already deployed by brands like White Castle, Krispy Kreme, and Jersey Mikes, so you may have already used it.

Source: SoundHound AI.

SoundHound has plenty of competition from other tech companies, but it claims it has 260 patents that have been granted or are pending. This is tremendously valuable, even though it isn’t quantified on the financial statements.

The implications for businesses based on cost savings and efficiency are massive. It’s important to acknowledge that jobs will be affected. However, technological advancements, from cars to the internet, create more jobs in the long run.

Is SoundHound stock a buy?

SoundHound makes money through royalties and subscriptions that are usage-based. In other words, the more orders, queries, or volume used, the more SoundHound gets paid. This is a terrific model because sales are recurring and increase dramatically from adoption. SoundHound’s revenue has grown impressively since it went public in April 2022 to $13 million in third-quarter 2023, as depicted below.

SOUN Revenue (Quarterly) Chart

SOUN Revenue (Quarterly) data by YCharts

More importantly, the company’s backlog (revenue to be recognized in future periods) grew from $303 million to $342 million year over year.

The company has tremendous potential, but investors should be cautious. SoundHound isn’t profitable or cash flow positive. Marketing, research, and development are expensive, and SoundHound generated cash by selling millions of shares. As you can see below, the share count is up 50% since SoundHound went public, ballooning to 242 million as of Q3.

SOUN Average Diluted Shares Outstanding (Quarterly) Chart

SOUN Average Diluted Shares Outstanding (Quarterly) data by YCharts

This gives the company the cash it needs to grow (over $100 million on hand as of Q3 2023), but dilutes existing shareholders. Hopefully, the aggressive dilution will end soon. The company forecasts $16 million to $20 million in Q4 2023 sales and predicts becoming EBITDA positive.

Fast-growing, relatively small companies like SoundHound are difficult to value. The $1 billion market cap is expensive for an unprofitable company generating $20 million in quarterly sales. However, if SoundHound’s technology keeps being adopted and sales ramp up, the current price will be a bargain.

Here’s the bottom line: Nvidia’s and SoftBank’s investments lend credibility but should be kept in perspective. SoundHound has a tremendous market opportunity but shaky financials. The stock is best for aggressive investors who don’t mind risk.

Bradley Guichard has positions in Nvidia and has the following options: long January 2025 $2 calls on SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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