Nvidia (NVDA -0.14%) is recognized as a leading provider of the most powerful data center chips, specifically designed for developing advanced artificial intelligence (AI) models. This remarkable capability has propelled the company’s market valuation to over $2.2 trillion in just the past two years, a testament to the phenomenal demand for its products and services.
In late 2023, Nvidia took strategic steps to diversify its portfolio by investing in several smaller yet innovative AI companies. One notable investment was in SoundHound AI (SOUN -2.41%), an industry leader in developing cutting-edge conversational AI technologies. However, a recent update revealed that SoundHound was conspicuously absent from Nvidia’s latest form 13F, which outlines its stock holdings as of December 31. This indicates that Nvidia opted to liquidate its entire stake in SoundHound by year-end.
Despite SoundHound’s stock reaching a historic high in December, it has since experienced a significant decline of over 64%. This raises an important question for potential investors: is this a prime buying opportunity or a warning sign from Nvidia’s exit? Let’s delve deeper to uncover the facts.
Unlocking Everyday Interactions with Conversational AI
SoundHound AI is passionately dedicated to integrating conversational AI into everyday life, empowering users to harness the power of intelligent software using only their voices. Impressively, over 30% of the top 20 quick-service restaurant chains around the globe utilize SoundHound’s innovative technology, along with leading automotive manufacturers, including Hyundai and Stellantis (the parent company of Chrysler, Jeep, and Dodge).
Restaurants leverage SoundHound’s technology to automate the food ordering process across various platforms—whether in-store, via phone, or at the drive-thru—thereby significantly alleviating the workload on human staff. Additionally, the company offers a feature called Employee Assist, which acts as a voice-activated virtual assistant. This tool helps employees comprehend menu items and store policies, enhancing their ability to serve customers effectively. SoundHound’s solutions are already implemented in approximately 10,000 locations, including popular chains such as Chipotle, Krispy Kreme, Papa John’s, and, as of the fourth quarter of 2024, even Burger King.
On the automotive front, SoundHound’s Chat AI assistant provides drivers with voice-activated access to a wealth of information, ranging from local dining recommendations to flight status updates. This highly customizable white-label solution allows manufacturers to tailor the assistant’s personality to align with their brand identity, creating a unique experience for users. For instance, the same assistant can adopt a different persona for a family vehicle compared to a high-performance sports car.
In January, SoundHound also unveiled a groundbreaking in-vehicle commerce platform, enabling drivers to place food orders while on the go without the need to use their phones. This system works seamlessly with the vehicle’s GPS technology to identify the most appropriate food outlets nearby, ensuring that even if a driver finds themselves in an unfamiliar city, they can easily request a pizza from the closest Italian restaurant.
SoundHound’s exceptional conversational AI software is founded on its proprietary Polaris speech recognition model, boasting a remarkable 20% higher accuracy rate than similar models developed by Alphabet‘s Google and up to 36% greater accuracy compared to OpenAI’s Whisper model. If SoundHound can maintain this competitive edge, it is poised to become the preferred choice for a growing number of businesses eager to incorporate AI into their operations.
Image source: Getty Images.
SoundHound’s Revenue Growth: A Promising Trajectory
SoundHound experienced an unprecedented financial year in 2024, with revenue skyrocketing by an impressive 85% to reach $84.7 million. This growth rate represents a significant acceleration compared to 2023, when the company reported a revenue increase of just 47%.
The acquisition of another prominent conversational AI company, Amelia, in August of the previous year has allowed SoundHound to diversify its revenue streams significantly. The company has expanded its reach beyond just restaurants and automotive industries, making inroads into sectors such as financial services and healthcare. Notably, SoundHound’s largest client accounted for merely 14% of its total revenue in 2024, a sharp decline from over half in 2023, highlighting its successful efforts to broaden its customer base.
Moreover, the company ended the year with an impressive order backlog of $1.2 billion, showcasing a 75% increase from the end of 2023. Management anticipates that this backlog will convert into revenue over a six-year span, and given the company’s rapid growth, this could signify substantial future revenue expansion.
Looking ahead, SoundHound’s guidance indicates the potential to generate up to $177 million in revenue by 2025, suggesting an astonishing growth rate of up to 109% could be on the horizon.
However, potential investors should be cautious about a significant challenge: SoundHound is facing considerable financial losses. The company’s generally accepted accounting principles (GAAP) net loss for 2024 was an alarming $350.6 million, representing a staggering 294% increase compared to 2023.
On a non-GAAP basis, which excludes one-time and non-cash expenses such as stock-based compensation, the loss was considerably lower at $69.1 million. Nonetheless, with only $198 million in cash reserves at the end of the last fiscal year, the company must address its spending issues to avoid unsustainable financial practices.
SoundHound’s Stock Valuation: Analyzing the Current Market Position
Even though SoundHound’s stock has experienced a significant decline of 64% from its all-time high, it remains relatively expensive. Based on last year’s revenue figures and the company’s market capitalization of $3.1 billion, the stock trades at a price-to-sales (P/S) ratio of 34.2.
This valuation is considerably higher than many other established AI leaders, including some trillion-dollar giants with extensive revenue streams and decades-long success. For instance, it seems unreasonable for SoundHound’s P/S ratio to trade at an astonishing 68% premium over Nvidia’s P/S ratio, especially considering that Nvidia is widely regarded as one of the highest-quality companies globally:
SOUN PS Ratio data by YCharts
When evaluating SoundHound’s valuation based on its projected 2025 revenue of $177 million, the stock’s forward P/S ratio stands at 17.9. However, this still represents a significant premium compared to Nvidia’s forward P/S ratio of 12.7.
While it is difficult to ascertain whether Nvidia’s decision to sell its entire stake in SoundHound at the end of last year was influenced by valuation concerns, it is worth noting that the chipmaker’s holdings amounted to only 1.73 million shares, valued at approximately $14.8 million at current prices. Even if Nvidia suffered a total loss on this investment, it would have a minimal impact on the company’s overall valuation of $2.6 trillion.
Ultimately, SoundHound’s high valuation could pose a substantial obstacle to further stock appreciation, prompting investors to exercise caution before considering new investments, especially in light of Nvidia’s withdrawal from the company.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Chipotle Mexican Grill, Microsoft, and Nvidia. The Motley Fool recommends C3.ai, Restaurant Brands International, and Stellantis and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.