Could SoundHound's Artificial Intelligence Potentially Emerge as the Next Nvidia?
In a short span of time, Nvidia (NVDA with a 0.75% increase) has emerged as one of the most lucrative investments lately, even surpassing a $1 trillion market cap. Interestingly, its value continued to rise, almost doubling again, leaving one wondering how high its shares might soar in the long term.
The primary factor fuelling Nvidia's success is the surge in artificial intelligence (AI). As the market's dominant player in AI GPUs, Nvidia has managed to capitalize on its position by delivering at the right time. The extensive spending on AI infrastructure is expected to escalate drastically in the future, a scenario that should undoubtedly benefit Nvidia greatly.
But for those seeking the next significant AI stock, the focus should shift to SoundHound AI (SOUN, currently experiencing a -1.46% drop). Despite a remarkable rise in share price this year, significant growth potential remains if the company can excel in some crucial growth domains.
SoundHound AI has an early advantage
When it comes to excelling in AI, starting early has proven to be a successful strategy. Nvidia invested heavily in research and development to launch its first AI GPUs, even when demand was limited. This early competitiveness enabled it to accumulate users and data, thus fostering a community of developers and providing valuable insights for future AI chips.
The strategy has paid off for Nvidia! Today, it dominates between 70% to 95% of the AI GPU market, a segment that has generated substantial profits, allowing it to invest heavily in new research and development projects. Quite clearly, being an early mover has given Nvidia a sustainable competitive advantage as the demand for AI grew.
In many ways, SoundHound AI finds itself in a similar position. Its name suggests a focus on the intersection of sound and AI. This voice recognition and natural language processing software can be integrated across various industries.
Fast-food chains are testing SoundHound AI's tech at drive-thru windows to enhance efficiency and reduce costs. Automakers are integrating the software into their vehicles, enabling drivers to communicate with their cars about maintenance and road conditions. Customer support is another significant area, with many companies using SoundHound AI technology to manage customer queries more efficiently.
These partnerships didn't just happen overnight. SoundHound AI has been in operation since 2005, amassing over 200 patents since its inception. In 2016, it introduced its open developer platform, which catalyzed a surge in sales. Over the past decade, several companies have partnered with SoundHound AI.
Just like Nvidia, these partnerships bring significant advantages to SoundHound AI, such as access to data and market validation. Real-world application cases fuel the development of more reliable models, while new customers serve as powerful testimonials for potential clients interested in SoundHound AI's tech stack.
Does SoundHound AI truly have the potential for 1,000% growth?
Unlike Nvidia, SoundHound AI continues to struggle with losses. Despite a substantial increase in revenue, the company is projected to generate less than $190 million in sales next year, while its current research and development expenses amount to only $64 million over the past 12 months.
SoundHound AI has undoubtedly established an early lead in its niche market. Yet, in the face of fierce competition from big tech companies, it might struggle to maintain its position without sufficient financial resources. Valuation is another challenge, as the stock now trades at an astonishing 88 times sales, a figure that may be difficult to justify over time.
Can SoundHound AI emulate Nvidia's remarkable rise? The chances are slim.
The sound AI market is much smaller than the AI GPU market. Admittedly, I was drawn to the stock in September when it was valued at less than $2 billion. However, the valuation ballooning to more than $7 billion now makes it an unattractive investment choice for me, given its inferior growth prospects compared to Nvidia, as well as a highly inflated valuation.
Stay cautious of this AI play should shares take a dip. But until then, I feel that SoundHound AI's stock presents less appealing investment prospects compared to Nvidia, despite its promising potential.
In the world of finance and investing, recognizing early Movers with a strong focus on their respective niche markets can yield significant returns. Similar to Nvidia's early investments in AI GPUs, SoundHound AI's focus on voice recognition and natural language processing has positioned it well in the market.
Despite SoundHound AI's early advantage and promising potential in the sound AI market, its financial situation is less robust than Nvidia's. With significant revenue growth and lower research and development expenses, SoundHound AI has the opportunity to sustain its early lead and capitalize on its partnerships. However, its high valuation and ongoing losses may present challenges for potential investors seeking a profitable return on investment.
