Nvidia’s strategic investment signals high potential in this emerging artificial intelligence (AI) company

Nvidia (NVDA -2.10%) is widely considered one of (if not THE) the best companies in artificial intelligence (AI) right now. Powered by best-in-class graphics processing units (GPUs), its hardware ecosystem is the dominant force in its sector. Without Nvidia products, many AI innovations would not happen.

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

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

SoundHound AI has huge potential

SoundHound’s AI technology revolves around audio recognition and interpretation. While the use cases for this technology are quite broad, the two areas that are seeing immediate success are the restaurant industry and automotive digital assistants.

In the restaurant industry, SoundHound technology has automated drive-thru windows and mobile order taking. Because this technology is quite accurate, its performance exceeds that of its human counterparts. By improving the user experience, SoundHound technology provides a critical upgrade to enhance the user experience while becoming even more efficient.

In the vehicle sector, SoundHound has integrated its software with ChatGPT to provide enhanced digital assistants in vehicles. His main partner was Stellarand this integration has been implemented in a handful of models in Europe and Japan. In addition, some of these models have started to come with Nvidia GPUs that already have the model pre-installed; This 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 into these two niches, it could turn into a very big business. However, the use cases for accurate audio recognition technology are massive, so the bar is set much higher for SoundHound.

But investing in SoundHound is not a safe bet.

SoundHound’s funding isn’t that impressive, but it has room to grow

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

However, it has the potential to become a much bigger business. An interesting metric from SoundHound is its cumulative subscriptions and bookings stock, which aggregates subscription revenue from the previous quarter and other contracts that have been signed. That figure was $723 million at the end of the second quarter, which doubled year over year. This shows the massive demand for the SoundHound product. Since many companies are just now starting to release their software, the next few years could be huge for SoundHound as some of this backlog is converted into real revenue.

Until then, SoundHound will struggle 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 a little longer.

However, given its business success so far, it is in no danger of going higher, as it could easily raise more money by issuing shares or becoming a takeover target.

You will have to pay if you want to own SoundHound shares.

SOUN PS Ratio given by YCharts

At 25 times sales, SoundHound is a very expensive stock, showing investors’ high hopes for the company. If SoundHound can turn much of the backlog into recurring revenue, then that price might be worth paying.

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