Shares of SoundHound AI (NASDAQ: SOUN) have exploded higher in recent weeks as investors have piled into this relatively obscure growth stock.
Since 7 February, the share price has gone from $1.71 to $8.24, which translates into a whopping 381% rise.
Is this an artificial intelligence (AI) stock to consider for my own portfolio? Let’s dig in.
Riding Nvidia’s coattails
For those unfamiliar, SoundHound’s tech enables brands to build conversational AI voice assistants.
On 14 February, investors noticed in a regulatory filing that chipmaker Nvidia had a stake in this tiny firm. Like clockwork, they piled in, believing the small-cap stock with AI handily incorporated into its name could be the next big thing.
The share price went up 66% in a single day!
However, it was quickly revealed that Nvidia had held this position for seven years, without actually adding to it. What’s more, these 1.73m shares were worth roughly $11m at the time.
Admittedly, they’re worth a bit more now, but this is still a drop in the ocean for an AI behemoth like Nvidia.
Helping feed customers
SoundHound is currently focused on in-vehicle and restaurant applications. For example, it has a partnership with fast food chain White Castle that allows customers to place orders without interacting with staff.
The firm also has a deal with Toast, the cloud-based restaurant management software company. Its SoundHound for Restaurants voice assistant can take multiple orders at once, as well as answering business inquiries, before integrating them with the Toast system.
Therefore, busy staff no longer have to choose between answering a call or serving customers in front of them.
More positive news
Big news out yesterday (18 March) was that SoundHound’s in-vehicle voice assistant would use a large language model while running on the Nvidia DRIVE platform.
Using edge computing, this will provide real-time generative AI capabilities even when there is no connectivity.
One example it gives is a driver saying: “I see a flashing light that looks like a car battery and I’m not sure what that means?”
The AI can deliver information directly from the car manual without the need to start flicking through that big chunky document.
The next Nvidia?
So far, so cool, I’d say. But what about the all-important numbers?
Well, the firm’s revenue grew 47% year on year to $46m, while it recorded an operating loss of $68m. In 2024, revenue is expected to accelerate 51% to around $70m, before exceeding $100m in 2025.
Unfortunately though, this anticipated high growth is already baked into the stock’s valuation. It is trading on an eye-watering forward price-to-sales (P/S) multiple of 39.8.
If next year’s revenue does reach $100m, the P/S multiple would drop to around 27. But even that is sky-high.
Now, a positive adjusted EBITDA of $2.8m is forecast for 2025, which is encouraging. And the stock could always keep going up in the near term. Meanwhile, a $2.5bn market cap suggests there is plenty of scope to grow over the long run.
As things stand though, this appears to be an overvalued growth stock caught up in the AI hype cycle.
Therefore, I don’t see evidence that it’s the next Nvidia, and I’d be very careful buying the shares at today’s valuation.
