Is it time to partner with Nvidia and invest in SoundHound AI?

Soundhound AI (Thorn -7.02%) The company has disappointed many investors since April 2022, when it merged with a special acquisition company (SPAC) and went public. The audio and speech recognition software company’s stock price started at $8.72 and soared to an all-time high of $14.98 in less than a month. later. But earlier this month, the stock was trading below $2.

The company’s stock price has slumped as sales growth has slowed, losses have piled up and rising interest rates have compressed the company’s valuation. Many investors dismissed it as another overvalued SPAC company that quickly lost its luster as the hype died down.

Image source: Getty Images.

But on February 15, SoundHound’s stock price has since skyrocketed by 67%. Nvidia (NVDA -1.98%) The company’s stock went public for $3.7 million. That’s essentially pocket change for Nvidia, which ended its latest quarter with $5.5 billion in cash and equivalents, but is the chipmaker’s investment a vote of confidence in the unpopular AI stock? Let’s take a look at why Nvidia is interested in his SoundHound and whether investors should follow his example.

Why is Nvidia investing in SoundHound AI?

This isn’t the first time Nvidia has invested in SoundHound AI. Back in 2017, the chipmaker’s GPU Ventures arm joined Samsung and 10 other investors in a $75 million funding round for the startup.

At the time, Nvidia and its fellow investors may have considered SoundHound AI to be a potential competitor. alphabet, microsoftand apple in the speech recognition software market. SoundHound’s namesake app identifies, discovers, and plays music, but its Houndify developer platform allows companies to create customized speech recognition tools without being tied to a single technology ecosystem. Masu.

Although Nvidia only owns about 0.7% of SoundHound’s outstanding shares, the investment is still a vote of confidence in the company’s ability to grow in the shadow of larger competitors. Nvidia may also believe that its nascent market will expand and evolve as new generative AI tools (primarily powered by its own data center GPUs) further enhance the capabilities of its voice-activated chatbots.

But should we follow Nvidia’s lead?

Nvidia’s investment suggests that SoundHound’s services and technology are promising, but investors should reconsider their biggest issues before following Nvidia’s lead. Over the past year, SoundHound’s revenue growth has slowed, gross margins have declined, and earnings before interest, taxes, depreciation, and amortization (EBITDA) have remained negative.

Data source: SoundHound AI. YOY = change from previous year.

The report attributes the slowdown to macro headwinds that have led many companies to rein in software spending. However, management’s fourth-quarter guidance calls for revenue growth of 68% to 111% year over year for adjusted EBITDA to eventually turn positive. The outlook suggests SoundHound is out of the cyclical bottom, with analysts believing the company’s sales rose 49% for the year. That would put the company on track to achieve the 45% compound annual growth rate from 2023 to 2025 that analysts expect.

SoundHound stock isn’t cheap at 15 times next year’s sales, but Mordor Intelligence is looking to expand into the high-growth niche of the voice recognition market, which is expected to expand at a CAGR of 23% from 2024 to 2029. That might justify the premium.

But investors shouldn’t ignore SoundHound’s glaring weaknesses. The company, which has already laid off half its employees last year, is not yet expected to be profitable on a generally accepted accounting principles (GAAP) basis any time soon. The company ended its most recent quarter with just $110 million in cash, making it less liquid than its $73 million net loss in the first nine months of 2023. Additionally, the company’s high debt-to-equity ratio may limit its earning power. We source fresh cash at reasonable rates.

May be worth a speculative investment

Nvidia’s decision to make such a small investment in SoundHound, rather than acquiring a larger stake or outright acquisition, suggests the AI ​​giant has its own concerns about the business. are doing.

While it may be a promising speculative strategy for long-term investors, its high valuation, high leverage, and persistent losses can limit short-term gains. In other words, investors can follow Nvidia’s lead and nibble on the stock, but they shouldn’t assume the chipmaker’s investment will firmly set a floor for its volatile price.