Nvidia's Investment in this Small AI Company Has Investors Excited: Is It a Buy?

Nvidia (NVDA -2.10%) is widely considered one of (if not the) best companies in artificial intelligence (AI) right now. Headlined by its best-in-class graphics processing units (GPUs), its hardware ecosystem is the dominant force in its sector. Without Nvidia's products, many AI innovations wouldn't be happening.

As a result of Nvidia being at the forefront of AI, it's exposed to many fantastic companies. So, when you see Nvidia take a position in one, it may be smart to pay attention to it. One of the five companies Nvidia owns stock in is SoundHound AI (SOUN -2.02%). While it's not a massive stake (currently valued at around $8.7 million), it is more than nothing.

So, is this a company investors should be paying closer attention to?

SoundHound's AI technology revolves around audio recognition and interpretation. While the use cases of this technology are quite broad, the two areas in which it's seeing immediate success are the restaurant industry and automotive digital assistants.

In the restaurant industry, SoundHound's technology has been automating drive-thru windows and mobile order-taking. Because this technology is quite accurate, its performance exceeds that of its human counterparts. By upgrading the user experience, SoundHound's technology delivers the critical upgrade of increasing user experience while also becoming more efficient.

In the vehicle sector, SoundHound has been integrating its software with ChatGPT to offer improved digital assistants in vehicles. Its primary partner has been Stellantis, and this integration has been rolled out in a handful of models in Europe and Japan. Additionally, some of these models have started to come with Nvidia GPUs that already have the model pre-installed; that way, the digital assistant still works even if there is no internet connection. This partnership is likely how Nvidia and SoundHound came together, and Nvidia liked what it saw to take a position in the stock.

If SoundHound continues to expand in these two niches, it could evolve into a very large business. However, the use cases for accurate audio recognition technology are massive, so the bar is much higher for SoundHound.

But investing in SoundHound isn't a surefire bet.

While SoundHound has been around for a while, it's just now starting to pick up steam as a company. In Q2, revenue totaled $13.5 million, which is up 54% year over year. That's a pretty small revenue total compared to many public companies, so it's clear that this is an early-stage investment.

However, it has the potential to grow into a much larger business. An interesting metric from SoundHound is its cumulative subscriptions and bookings backlog, which adds up the previous quarter's subscription revenue and other contracts that have been signed. This figure was $723 million at the end of Q2, which doubled year over year. This shows massive demand for SoundHound's product. Because many companies are just now starting to roll out their software, the next few years could be huge for SoundHound as some of this backlog is converted to real revenue.

Until then, SoundHound will be fighting to survive, as its net loss was $37 million (on a GAAP basis). With a cash balance of $160 million (after a recent acquisition), SoundHound has enough liquidity to stay afloat for a little longer.

However, given its business success so far, it is in no danger of going belly up, as it could easily raise more money through share issuing or become an acquisition target.

You'll have to pay up if you want to own SoundHound's stock.

SOUN PS Ratio data by YCharts

At 25 times sales, SoundHound is a very expensive stock, showing investors' high hopes for the company. If SoundHound can turn a large chunk of its backlog into recurring revenue, then this price may be worth paying.

However, I think investors need to think of SoundHound more as a homerun style of investment, as it could be a boom or bust. With that in mind, taking a small position is an OK proposition. But I'd caution against overweighting a portfolio toward SoundHound, as there are just too many unknowns at this time.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.

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