Nvidia doubled down on this artificial intelligence (AI) stock. Should you buy it too?

In February, Nvidia (NVDA -4.08%) released its first 13-F filing, which revealed that the company bought a handful of stocks in the last quarter of 2023. Each of them has a presence in the artificial intelligence (AI) industry, so it’s a good way for Nvidia to to capture value from that space outside of its core semiconductor business.

Nvidia bought 1.7 million shares of SoundHound AI (SOUND -2.90%)which were valued at $3.6 million at the end of 2023. With SoundHound shares now trading at $4.50, Nvidia’s position is worth about $7.8 million — representing a whopping 116% gain in less than a year.

SoundHound is a specialist in conversational AI and has amassed an impressive list of clients. The company’s revenue is growing rapidly, and management’s forecast for the future is incredibly strong. So should investors be following Nvidia in the stock?

Image source: Nvidia.

A leader in conversational AI

SoundHound has developed a suite of conversational AI products for companies in the hospitality, automotive and food industries. They are trained to recognize voice inputs and respond in kind, so the user can harness the power of AI without having to type a single word.

Restaurant chains use SoundHound AI to autonomously take customer orders in the drive-thru and in-store, which reduces employee workload. Family barbecue and sports bar chain Beef ‘O’ Brady’s just rolled out AI SoundHound ordering system to all corporate locations and offered franchisees the option to use it as well.

Many restaurants also use SoundHound Employee Assist software, which is custom-trained for each location to provide workers with menu information, internal policies and more. Chipotle, Krispy Kremeand Five Guys are just a few of SoundHound’s other major restaurant customers.

On the automotive side, SoundHound’s Chat AI voice assistant is now live on six brands from Stellarincluding Peugeot and Alfa Romeo. It is capable of providing the driver with information on a variety of topics on demand, whether it’s the weather, sports scores or the status of an upcoming flight. In addition, the SoundHound AI Vehicle Intelligence product is trained on each vehicle’s manual, so drivers can instantly access information about its features.

In early August, SoundHound announced the acquisition of Amelia, an AI company that helps companies create and deploy virtual agents to serve their customers and employees. The combined companies will serve hundreds of customers, and the deal will expand SoundHound’s reach into other industries such as healthcare, insurance, financial services and more.

SoundHound is growing fast

SoundHound generated $13.5 million in revenue in the second quarter of 2024, a staggering 54% year-over-year increase. The strong result (combined with the Amelia acquisition) led management to raise its full-year guidance for both 2024. and 2025.

The company now expects to bring in $80 million this year, which would be a 74.3% increase over its 2023 result, followed by at least $150 million in 2025 (including $45 million from Amelia), which will represent an accelerated growth of 87.5%.

In addition, SoundHound ended the second quarter with a record $723 million in bookings, nearly doubling from the year-ago period. Bookings represent the company’s backlog, so its long-term revenue stream also looks very robust.

However, SoundHound’s bottom line is a concern, as the company is still investing heavily in growth at the expense of profitability, and will likely continue to do so until it reaches size. This resulted in a net loss of $37.3 million in Q2, which was a 60% increase from the year-ago period.

The company’s non-GAAP (generally accepted accounting principles) net loss — which strips out one-time and non-cash expenses such as stock-based compensation — was better at just $14.8 million, a slight improvement from $16 million in the year-ago quarter.

SoundHound ended the second quarter with $200 million in cash on its balance sheet, so it can afford to take losses for the foreseeable future. However, there is a risk that the company will require a capital increase at some point in the future before achieving sustained profitability, and this usually dilutes existing investors.

Stocks may be worth a small spot in your portfolio

Based on SoundHound’s trailing 12-month revenue of $55.4 million and market cap of $1.6 billion, its stock trades at a price-to-sales (P/S) ratio of 29.1. That makes it even more expensive than Nvidia, which trades at a P/S multiple of 27.3! Given that Nvidia operates at the forefront of the AI ​​industry and has a track record of success spanning decades, it would seem unreasonable for SoundHound stock to trade at a premium valuation.

However, SoundHound’s revenue growth is actually poised to surpass Nvidia’s in 2025 (as long as management’s guidance is correct). Based on SoundHound’s estimated 2024 revenue of $80 million, its stock trades at a forward P/S ratio of 20.1. Its P/S ratio drops further to just 10.7 based on the company’s estimated 2025 earnings.

Therefore, investors looking to hold SoundHound stock for at least the next two years could be getting a bargain at the current price. The story looks even more promising in the long term, as the company believes enterprise spending on AI will top $250 billion over the next three years.

With all that said, I want to close with a very important point. SoundHound is still in the early stages of monetizing its AI products, and the ride won’t always be smooth sailing. So, it would be best for investors to keep their positions small to mitigate potential risks. After all, even Nvidia wasn’t all in — it’s a $2.6 value trillion company, so he probably won’t see the $3.6 million loss if his investment in SoundHound stock doesn’t work out.