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In just 18 months, Nvidia (NASDAQ: NVDA) has seen its market capitalization soar from $360 billion to over $2.2 trillion, securing its position as the third-largest company globally, behind Apple and Microsoft. This meteoric rise is largely attributed to the explosive growth in artificial intelligence (AI).
AI: The Driving Force Behind Nvidia's Growth
Nvidia designs the world's most powerful graphics processing units (GPUs) for data centers, which developers use to build, train, and deploy AI models. This segment of Nvidia's business has been a significant contributor to its success. In fiscal 2024, Nvidia's data center revenue surged by 217%, a trend that is expected to continue into fiscal 2025.
The rapid expansion of the AI industry presents vast opportunities, and Nvidia is leveraging its wealth to make strategic investments in other companies within the sector.
Nvidia's Recent AI Investments
At the end of 2023, Nvidia filed a 13F with the Securities and Exchange Commission, revealing new holdings in five different stocks:
- Arm Holdings: Specializes in designing processors for the world's largest chip companies. Nvidia invested approximately $147 million in Arm Holdings, making it the largest of the five investments.
- Recursion Pharmaceuticals: Utilizes AI to accelerate the drug discovery process.
- Nano-X Imaging: Employs AI technology to enhance medical imaging and improve patient outcomes.
- TuSimple Holdings: Focuses on developing autonomous driving technologies for the trucking industry.
- SoundHound AI (NASDAQ: SOUN): A specialist in conversational AI technologies.
SoundHound AI: A Promising Investment
Among these investments, SoundHound AI stands out as a notable performer. Its stock price has increased by 160% in 2024, more than doubling Nvidia's initial investment. SoundHound AI specializes in conversational AI, using voice recognition to create various business applications.
Major restaurant chains like Applebee's, Chipotle, and Krispy Kreme are utilizing SoundHound's technology to manage customer orders across different channels, including in-store, over the phone, and in drive-thrus, thereby reducing employee workload. Additionally, SoundHound's Employee Assist tool provides workers with an AI virtual assistant capable of answering questions related to in-store policies or menu items.
The company's technology is also integrated into voice assistants in vehicles from manufacturers such as Mercedes-Benz, Hyundai, and Stellantis (which owns Chrysler, Jeep, and Dodge). This application helps drivers navigate car features and can answer general questions about weather, sports scores, and nearby attractions. Furthermore, Nvidia is collaborating with SoundHound to enhance its Nvidia Drive platform, an autonomous vehicle solution, by integrating a voice assistant that operates without internet connectivity, ensuring greater privacy.
Financial Outlook and Risks
Despite its potential, SoundHound AI is still in its early stages of growth. In the first quarter of 2024, it generated $11.6 million in revenue, a 73% increase from the previous year. The company has projected a record-high $71 million in total revenue for the full year, representing a 55% year-over-year growth.
SoundHound also reported a significant order backlog valued at $682 million, an 80% increase from the previous year. This backlog is expected to convert into revenue over approximately seven years, with some subscription-based customers converting in as little as four years. However, the company is in the scale-up phase, requiring substantial capital investment. As a result, SoundHound reported a $33 million loss in the first quarter, which is 20% larger than its loss from the same period last year.
While Nvidia's investment in SoundHound AI underscores its potential, it is still a speculative bet. SoundHound had $226 million in cash on hand at the end of the first quarter, and it cannot sustain its losses indefinitely. The company has established an at-the-market facility to raise funds by selling new shares, but its path to profitability remains uncertain.
On a positive note, SoundHound's management anticipates achieving profitability on an adjusted EBITDA basis by 2025. However, investors should approach with caution given the high price relative to the risks involved. With a market cap of $1.8 billion and trailing 12-month revenue of $50.8 million, SoundHound's price-to-sales (P/S) ratio stands at 35, compared to Nvidia's P/S of 36 and Microsoft's 13.6.
Thus, while Nvidia's investment is notable, potential investors should consider their risk tolerance and the current valuation before following suit. It may be prudent to wait for a more attractive price or for the company to demonstrate sustained profitability.
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