SoundHound AI (NASDAQ: SOUN) has been a disappointment for many investors since it went public through a special purpose acquisition company (SPAC) merger in April 2022. The stock opened at $8.72, reached a high of $14.98, but recently plummeted to under $2.
The decline in stock price was due to slowing revenue growth, mounting losses, and higher interest rates affecting its valuation. Many investors viewed it as an overvalued SPAC listing that lost its appeal as the initial hype faded.
However, on Feb. 15, SoundHound’s stock surged 67% after Nvidia (NASDAQ: NVDA) revealed a $3.7 million stake in the company. While a small amount for Nvidia, the investment raised questions about the AI stock’s potential. Let’s explore why Nvidia might be interested in SoundHound and whether investors should follow suit.
Why would Nvidia invest in SoundHound AI?
This isn’t the first time Nvidia has invested in SoundHound AI. In 2017, Nvidia’s GPU Ventures arm participated in a funding round alongside Samsung and others. SoundHound AI was seen as a potential competitor to big players like Alphabet, Microsoft, and Apple in the voice recognition software market.
While Nvidia holds a small stake in SoundHound, the investment signifies confidence in the company’s growth potential against larger rivals. Nvidia likely expects the voice recognition market to expand with the evolution of generative AI tools, primarily powered by its own data center GPUs, making voice-activated chatbots more advanced.
But should you follow Nvidia’s lead?
Nvidia’s investment hints at promise in SoundHound’s services and technology, but investors should assess its challenges before emulating Nvidia’s move. SoundHound’s revenue growth has slowed, gross margins declined, and EBITDA remained negative over the past year.
| Metric | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Revenue growth (YOY) | 178% | 84% | 56% | 42% | 19% |
| Gross margin | 77% | 71% | 71% | 79% | 73% |
| Adjusted EBITDA margin | (151%) | (196%) | (221%) | (113%) | (55%) |
Data source: SoundHound AI. YOY = year over year.
While the slowdown was attributed to macroeconomic factors impacting software spending, SoundHound expects a revenue increase of 68% to 111% in the upcoming quarter, signaling a positive EBITDA. Analysts predict a 49% revenue growth for the year, aligning with a 45% compound annual growth forecast from 2023 to 2025.
Although SoundHound’s stock is priced at 15 times next year’s sales, it may justify the premium by expanding its voice recognition niche, which is anticipated to grow at a 23% CAGR from 2024 to 2029 according to Mordor Intelligence.
Despite the potential, investors should acknowledge SoundHound’s weaknesses. A significant workforce reduction occurred last year, yet profitability on a GAAP basis remains uncertain. With limited cash reserves and high debt-to-equity ratio, raising capital could be challenging at favorable terms.
It might be worth a speculative investment
Nvidia’s cautious investment in SoundHound implies lingering doubts about the business. While a speculative play for long-term investors, the high valuation, leverage, and ongoing losses may restrict immediate gains. Investors could follow Nvidia by cautiously investing in the stock, without assuming Nvidia’s stake provides solid support for its volatile price.
Should you invest $1,000 in SoundHound AI right now?
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Leo Sun holds positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool recommends options related to Microsoft. For more information, refer to The Motley Fool’s disclosure policy.
Is It Time to Roll With Nvidia and Invest in SoundHound AI? was originally published by The Motley Fool
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