Got $5? You Could Buy One of Nvidia's Top AI Stocks

Nvidia (NASDAQ: NVDA) is currently recognized as one of the leading entities in the realm of artificial intelligence (AI). Its graphics processing units (GPUs) play a crucial role in its development, rendering it a commendable avenue for AI investment.

However, Nvidia's shares are not among the most economical options available, and apprehensions may arise regarding its future following its remarkable performance in 2023 and thus far in 2024. Given its investments exceeding $100 million in other companies, disclosure of these ventures is imperative. Among these investments lies SoundHound AI (NASDAQ: SOUN), attainable for less than $5 per share.

With SoundHound securing its position as one of Nvidia's premier AI investments, does it warrant a purchase?

SoundHound's Reach Across Diverse Industries

SoundHound's product range centers on facets involving verbal interaction. Leveraging its cutting-edge offerings, its voice recognition technology finds application across various sectors, including hospitality and automotive.

For instance, SoundHound collaborated with Jersey Mike's Subs to introduce AI facilitating phone orders. This collaboration marks a significant enhancement for Jersey Mike's: eliminating the need for manual order-taking by employees. Moreover, it enables simultaneous handling of multiple orders, thereby minimizing the likelihood of potential customers growing impatient and seeking alternatives.

On the automotive front, SoundHound has partnered with multiple automobile manufacturers to enhance their digital assistant technology. Presently, many drivers underutilize this technology due to its limited utility and frequent errors. Consequently, SoundHound is integrating generative AI technology such as ChatGPT into digital assistants to substantially augment their utility.

A drawback is its reliance on internet connectivity for operation. Identifying this challenge, SoundHound and Nvidia have collaborated to embed SoundHound's technology onto one of Nvidia's automotive GPUs, obviating the need for constant connectivity.

As generative AI products progressively assimilate into our daily lives, verbal prompts are poised to emerge as a pivotal component. Given SoundHound's robust AI applications, it is positioned as a frontrunner in this domain, elucidating Nvidia's investment rationale.

SoundHound's Potential as a Dominant Force in AI

Despite SoundHound's collaborations with prominent industry players, its revenue streams remain relatively modest. In the fourth quarter, revenue surged by 80% year-over-year, albeit reaching only $17 million. This trend is unsurprising, considering the ongoing expansion of its product portfolio.

Investors should also consider its backlog, reflecting the quantum of contracted future revenue. With the backlog standing at $661 million by the fourth quarter's conclusion, it is substantial. Although this revenue is not assured, it underscores the potential for substantial expansion in SoundHound's existing industry partnerships.

Given SoundHound's scale, profitability remains elusive. A fourth-quarter operating loss of $12.4 million underscores its journey towards profitability. The absence of profits typifies the risk inherent in investing in early-stage companies, a factor investors must duly acknowledge.

Furthermore, the stock bears a premium valuation attributable to Nvidia's ownership stake, albeit diminishing since its initial disclosure.

At 20 times sales, it may not present the most cost-effective investment opportunity. However, given SoundHound's rapid growth trajectory and the prospects ahead, this premium is unsurprising.

So, what should prospective investors do? Given SoundHound AI's potential, I advocate maintaining a modest position (no more than 1%). This approach ensures substantial profit potential in the event of significant stock appreciation, while mitigating the impact of a complete loss on one's portfolio.

SoundHound AI harbors the potential to wield considerable influence in the AI landscape. Nevertheless, competition from established players and the possibility of technology replication necessitate a cautious, balanced investment approach.

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