Nvidia (NASDAQ:NVDA) supplies the most powerful data center chips for developing artificial intelligence (AI) models. In fact, the company's valuation has soared by more than $2.2 trillion over the last two years because sales have been so strong.
In late 2023, Nvidia started spreading some of its wealth by investing in a handful of smaller AI companies. One of them was SoundHound AI (NASDAQ:SOUN), which is a leading developer of conversational AI technologies. But when Nvidia released its latest form 13F detailing its stock holdings as of Dec. 31, SoundHound was notably missing. It turns out the chipmaker decided to sell its entire stake at the end of last year.
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SoundHound stock hit a new record high in December, but it has since plunged by more than 64%. Could this be a buying opportunity for investors, or is Nvidia's recent exit a sign to steer clear? Let's find out.
A conversational AI specialist
SoundHound AI is on a mission to embed conversational AI into daily life, allowing people to leverage the capabilities of intelligent software by using nothing more than their voice. Over 30% of the top 20 quick-service restaurants in the world are using SoundHound's technology, as are some of the biggest car manufacturers, from Hyundai to Stellantis (which owns Chrysler, Jeep, and Dodge).
Restaurants use SoundHound to automate food ordering in-store, over the phone, and in the drive-thru, reducing the workload on human employees. The company also offers a tool called Employee Assist, which is a voice-activated virtual assistant capable of helping workers understand menu items and store policies to better serve their customers. SoundHound is already used in 10,000 locations from popular chains like Chipotle, Krispy Kreme, Papa John's, and, as of the fourth quarter of 2024, Burger King.
On the automotive side, SoundHound's Chat AI assistant allows drivers to request information on a range of topics using their voice, whether they want to find the best local restaurants or know the status of their upcoming flight. Chat AI is a white-label solution that is highly customizable, so manufacturers can tweak its personality to suit their brand. It can even take on a different persona for a family car versus a sports car.
In January, SoundHound also launched an in-vehicle commerce platform that allows drivers to place food orders while on the road, without picking up the phone. It syncs with the vehicle's GPS system to find the most suitable locations, so even if the driver is in an unfamiliar town, they can simply ask the assistant to order a pizza from the nearest Italian restaurant.
SoundHound's conversational AI software is underpinned by its Polaris speech recognition model, which is 20% more accurate than equivalent models developed by Alphabet's Google, and up to 36% more accurate than OpenAI's Whisper model. If the company can maintain that advantage, it will remain a go-to choice for more businesses that are looking to incorporate AI into their operations.
Image source: Getty Images.
SoundHound's revenue is soaring
SoundHound had a record year in 2024, with revenue soaring 85% to $84.7 million. That growth rate marked a significant acceleration from 2023, when the company's revenue increased by just 47%.
Thanks to the acquisition of another conversational AI company called Amelia in August last year, SoundHound also significantly diversified its revenue base. It was able to expand beyond restaurants and car manufacturers to enter new industries like financial services and healthcare. In fact, SoundHound's largest customer accounted for just 14% of its total revenue in 2024, down from more than half of its total revenue in 2023.
On that note, the company ended the year with a whopping $1.2 billion order backlog, representing a 75% increase from the end of 2023. Management expects this backlog to convert into revenue over a period of six years, and since it's expanding so quickly, this could translate into significant future growth at the top line.
SoundHound's guidance suggests it could generate up to $177 million in revenue during 2025, implying its growth rate could accelerate again to an eye-popping 109%.
Unfortunately, there is one glaring issue investors need to be wary of: SoundHound is losing truckloads of money. Its generally accepted accounting principles (GAAP) net loss came in at $350.6 million in 2024, which was a staggering 294% increase from 2023.
The loss was much smaller on a non-GAAP basis, which excludes one-off and noncash expenses like stock-based compensation, coming in at $69.1 million. However, with just $198 million in cash on hand at the end of last year, the company can't afford to keep burning through money at this pace for perpetuity.
SoundHound stock isn't cheap, despite its sharp decline
SoundHound stock might be down 64% from its all-time high, but it's still quite expensive. Based on last year's revenue and the company's market capitalization of $3.1 billion, the stock trades at a price-to-sales (P/S) ratio of 34.2.
That is a substantial premium to a basket of other AI leaders, some of which are trillion-dollar giants with hundreds of billions of dollars in revenue, and track records of success that span decades. For example, it doesn't make much sense for SoundHound's P/S ratio to trade at a whopping 68% premium to Nvidia's P/S ratio, considering Nvidia is one of the highest-quality companies in the entire world:
SOUN PS Ratio data by YCharts
SoundHound's valuation looks a little more reasonable when calculated using its forecast 2025 revenue of $177 million, which places its stock at a forward P/S ratio at 17.9. However, that still tops Nvidia's forward P/S ratio of 12.7 by a wide margin.
It's impossible to know whether valuation had any bearing on Nvidia's decision to sell its entire stake in SoundHound at the end of last year. After all, the chipmaker only held 1.73 million shares, which would be worth just $14.8 million at today's price. Even if it suffered a complete loss, it wouldn't have impacted the $2.6 trillion giant one bit.
Nonetheless, SoundHound's valuation could be a real headwind that prevents further upside, so regular investors might want to think twice before buying in -- especially with Nvidia out of the picture.
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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.
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