Shares of SoundHound AI (NASDAQ: SOUN) plunged following a revelation that Nvidia (NASDAQ: NVDA) exited its investment in the voice artificial intelligence (AI) company. The stock is now down more than 40% on the year as of this writing; however, it is up more than 385% over the past year.
SoundHound stock was pulled out of obscurity when it was revealed that the semiconductor giant purchased shares in the company in the fourth quarter of 2023. The stock immediately rocketed higher on the news, but it made its biggest move late in 2024, which appears to be when Nvidia was dumping its shares.
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Should investors hold onto SoundHound shares, or should they follow Nvidia and exit?
Looking to be a leader in voice AI
SoundHound operates an AI voice platform that enables voice assistants to interact with people in a more natural and conversational tone. It combines speech-to-meaning technology and deep-meaning-understanding technology to process speech in real time while recognizing a user's intent.
The company generates revenue from both product royalties and subscriptions. When a customer incorporates its AI voice platform into a product, it collects royalty payments based on the volume, usage, or life of the applicable product. Meanwhile, it also sells its platform via subscription for industries where there is no product involved. Both forms of revenue tend to be largely recurring in nature.
SoundHound made solid in roads in the automobile space, where it has relationships with about 20 auto brands, including Jeep, Hyundai, Kia, Fiat, Chrysler, and RAM, among others. Still, it is in only between 3% and 5% of its customers' current unit production. It sees an opportunity in the next few years to be between 40% and 45% of its current customer unit production, while gaining more customers in the space.
The second big vertical the company has gotten into is the restaurant space, where it has relationships with both leading industry chains as well as restaurant-focused technology and payment companies. SoundHound has several solutions for the restaurant industry, including taking orders through drive-thrus, kiosks, and over the phone. It also has a solution that helps with employee training.
More recently, the company acquired Amelia, which is known for its conversational and generative AI platform that helps with customer service, employee onboarding, and back-office tasks. Amelia helps move SoundHound into other industry verticals such as healthcare, retail, telecom, financial institutions, and insurance.
The company's ultimate goal appears to be to become the premier AI-powered commerce voice ecosystem that is able to handle complex interactions across industries that all have their unique jargon. This could be something like making a doctor's appointment while taking in a patient's health insurance information and directing them to the right type of doctor. Or it could be something like helping a client make an options trade at a brokerage.
SoundHound has been growing its revenue quickly, albeit from a small base. In the third quarter, it grew its revenue by 89% year over year to $25.1 million. The company is projecting 2024 revenue to be between $82 million and $85 million, growing to a range of $155 million to $170 million in 2025.
Image source: Getty Images.
Valuation getting more reasonable
SoundHound's valuation had gotten a bit out of hand when the stock shot up to well above $20 late in 2024 and it traded at a price-to-sales (P/S) multiple of over 40 times 2025 analyst estimates. With the recent pullback, the stock now trades at a somewhat more reasonable 21 times forward P/S. With revenue growth expected to about double in 2025, that's not outrageous, although where revenue growth settles in thereafter will better determine if its valuation makes sense. Meanwhile, the company's P/S multiple was lower for much of 2024.
SOUN PS Ratio (Forward 1y) data by YCharts
Nvidia undoubtedly made a really great return on its SoundHound investment, so it is perhaps not surprising that it sold out of its position when the stock's share price and valuation went parabolic at the end of 2024.
Today the stock's valuation is a bit more reasonable, although certainly not in the bargain bin. The company has a lot of potential as it looks to become the premier AI-powered commerce voice ecosystem, but there is competition in the space and ultimately the stock is still a speculative investment at this point.
As such, I would suggest any early investors to at least take some partial profits in the stock.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
