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Companies invest in other companies all the time without any promotion. However, when a company reaches the following sizes and positions, it attracts attention. Nvidia (NVDA -0.49%) It will happen. This was the case when Nvidia’s filing revealed his $3.7 million position. Soundhound AI (Thorn 19.30%). As you can see, the stock price skyrocketed overnight.
By comparison, SoundHound’s market cap is about $1 billion, so this investment is well under 1% of its market cap, and almost nothing compared to Nvidia’s market cap of about $2 trillion. But that wasn’t the only news. SoftBank Group is home to many successful technology companies ( arm holdings (arm -5.64%)You can read about it here), bought 1.1 million shares in the fourth quarter of 2023. Neither of these investments will make a ton of money, but investors are asking the following questions:
What does SoundHound AI do?
Gone are the days when fast food restaurants had people taking orders. Sure, you still need a human to monitor it, but voice recognition technology does the heavy lifting for you. Virtual assistants using voice recognition and AI are also evolving in cars. SoundHound’s technology allows people to communicate conversationally and make complex orders and inquiries. That’s incredible.
As you can see below, SoundHound’s software has already been deployed by brands like White Castle, Krispy Kreme, and Jersey Mikes, so you may already be using it.
Source: SoundHound AI.
SoundHound has a lot of competition from other tech companies, but it claims to have 260 patents issued or pending. Although not quantified in financial statements, this is extremely valuable.
The impact of cost savings and efficiency on your business is enormous. It is important to recognize that your work will be affected. But advances in technology, from cars to the internet, create more jobs in the long run.
Is SoundHound stock a buy?
SoundHound generates revenue through usage-based royalties and subscriptions. In other words, the more orders, queries, or usage you receive, the more rewards SoundHound receives. This is a great model because sales occur repeatedly and increase dramatically with adoption. As shown below, SoundHound’s revenue has experienced impressive growth since its listing in April 2022, reaching $13 million in Q3 2023.
SOUN Revenue (Quarterly) Data by YCharts
More importantly, the company’s backlog (revenue recognized in future periods) increased from $303 million to $342 million year over year.
The company has great potential, but investors should be cautious. SoundHound is neither profitable nor cash flow positive. Marketing, research, and development were expensive, and SoundHound sold millions of shares to generate cash. As you can see below, since SoundHound went public, his share count has increased by 50%, taking him to 242 million as of Q3.
SOUN Average Diluted Shares Outstanding (Quarterly) Data by YCharts
This will give the company the cash it needs to grow (it has more than $100 million in cash as of Q3 2023), but it will dilute value for existing shareholders. We hope that aggressive dilution ends soon. The company expects sales to be between $16 million and $20 million in the fourth quarter of 2023, with positive EBITDA.
A relatively small, fast-growing company like SoundHound is difficult to value. A $1 billion market cap is a lot for an unprofitable company that generates $20 million in quarterly sales. However, if SoundHound’s technology continues to be adopted and sales increase, the current price will become a bargain.
The main points are: Nvidia and SoftBank’s investments add credibility, but you should always keep things in perspective. SoundHound has a huge market opportunity, but its financial position is unstable. This stock is perfect for aggressive investors who don’t mind risk.
Bradley Guichard has a position in Nvidia with the following options: Long January 2025 $2 calls on SoundHound AI. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
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