Should You Buy Nvidia Favorite SoundHound AI Stock? – The Motley Fool

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The stock is up 100% this year after announcing a partnership with Nvidia.

Everything that Nvidia touches right now seems to turn to gold. The euphoria around artificial intelligence (AI) stocks has reached a fever pitch, with investors wanting the next “hot stock” in their portfolios.

Nvidia has been the leader in providing companies with computer chips and software for these new AI tools, and is now one of the largest businesses by market cap in the world. Its market value is currently $2.2 billion. The stock is up 500% since the beginning of 2023.

It is no surprise then to see SoundHound AI (SOUN -1.71%) rocketing higher after it was revealed Nvidia had invested in the company and formed a product partnership. Should you follow Nvidia and buy some SoundHound AI stock for yourself?

What is SoundHound AI?

SoundHound AI is — as its name implies — focused on voice AI services. Generally, this means providing businesses automated voice technology. According to SoundHound’s website, this includes multiple languages and best-in-class accuracy.

In practice, this translates to major partnerships with automotive companies and large restaurant chains. If you’ve driven in a new Honda vehicle or eaten at a White Castle recently, there’s a chance you have interacted with a SoundHound AI product. Companies want to integrate voice technology into their products to hopefully improve the customer experience and reduce monotonous work for employees (such as taking customer orders at a fast food chain).

So where does Nvidia fit in? SoundHound AI just announced a partnership with Nvidia to offer on-chip AI using Nvidia’s ecosystem of products. This means someone can access SoundHound’s voice technology without needing an internet connection. The two companies will be focused on automotive systems, where both already have a strong presence.

Fast growth, but no profits

The good news is that SoundHound AI is growing quickly. Full-year revenue grew 47% in 2023 to $45.9 million, with a major acceleration in Q4 to 80% year-over-year growth.

Management keeps announcing major partnerships. Along with Nvidia, the company signed a deal with a large automotive manufacturer to embed its technology all the way through to 2037, is now working with Jersey Mike’s, and acquired SYNQ3 (yes, that is actually the company name) to help grow its restaurant product suite.

The bad news is, SoundHound AI is highly unprofitable. Its operating margin is a concerning -139% over the last 12 months, and it burned around $70 million in free cash flow in 2023. With less than $100 million in cash on the balance sheet, SoundHound AI either needs to raise money or quickly get to profitability. And it has a long way to go if it is to flip to black.

SOUN PS Ratio data by YCharts

Look elsewhere for your portfolio

Voice AI sounds exciting, but investors should remember that this technology was hyped a few years back with little actual product uptake. Remember all the advertising around Apple‘s Siri, Amazon‘s Alexa, and Alphabet‘s Google’s voice assistant? The most advanced technology companies in the world have poured tens of billions of dollars trying to build voice technology products and have mostly failed.

Why will little old SoundHound AI beat them to the punch? I have my doubts. Maybe this is finally the decade where AI voice assistants take off. But if it is, I would bet that companies like Amazon, Google, or Alphabet will win given their huge research budgets and distribution advantages.

There is also a concern about SoundHound AI’s valuation. At its current stock price, the company trades at a price-to-sales ratio (P/S) of 26. This is approximately 10x the S&P 500 average and indicates that SoundHound AI may be wildly overvalued. For these combined reasons, investors should not buy SoundHound AI stock right now.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, and Nvidia. The Motley Fool has a disclosure policy.

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