I love Nvidia stocks. Who wouldn’t? Over the past year, shares have increased by more than 160%. Much of this increase can be attributed to the rapid growth in demand for AI components. As the market leader in graphics processing units (GPUs) — a critical component for most AI infrastructures — the company has seen demand skyrocket in recent years.
But Nvidia isn’t the only company benefiting from the rise of AI. There’s a significantly smaller company that also stands to benefit, even if the market hasn’t yet figured it out.
Bet on AI with this under-the-radar stock
Everyone is talking about AI these days. The excitement has sent valuations of most AI companies through the roof. However, some companies have not seen their market caps rise as much as others. One relatively small AI company in particular has flown under the radar. There are risks to investing in this business, but also huge potential upside.
The company in question is none other than SoundHound AI (NASDAQ: SOUND). I wrote about this AI business a few months ago. Since then, shares have risen by more than 20%. But the latest surge in valuation could be just the beginning.
As the name suggests, SoundHound AI focuses on AI applications related to sound. This will be one of the biggest ways everyday consumers interact with AI technologies. Whether it’s asking your phone what song is currently playing or chatting with a customer service agent who is actually a robot in disguise, the revolution has already begun. But interacting with AI via your voice is still in its infancy. In a few years, we could be discussing all sorts of things with the help of an AI agent.
For example, SoundHound has already implemented its technology in a handful of car brands, including Kia, Hyundaiand Jeep, which allow drivers to discuss maintenance issues and other mechanical questions directly with the vehicle. SoundHound has also partnered with restaurants, including Applebee’s and White Castle, to increase efficiency and reduce costs at drive-thru windows through the use of voice AI agents.
In total, SoundHound holds more than 200 patents related to its AI technology, covering everything from speech recognition to natural language processing. Management believes the company has the “most advanced standalone speech AI platform on the market” — a market it believes is worth at least $140 billion in total. With a market cap of less than $2 billion, SoundHound stock seems like a great way to add some massive growth potential to your portfolio.
However, there are a number of risks that investors should be aware of before jumping in.
Understand These 2 Things Before Investing In SoundHound
If SoundHound can capitalize on its growing customer list and prove its technologies across industries and use cases, it will have a strong position in a market that should grow dramatically over the next decade or more. In that scenario, the company would likely be worth far more than its current $1.7 billion valuation. But there are two risks that could derail that thesis.
SOUN Research and Development Expense (TTM) data from YCharts.
First, SoundHound has limited funding. It currently has just $200 million in cash and cash equivalents on its balance sheet. That compares with just $42 million in total liabilities, but the problem is that SoundHound still loses money every quarter. In the last quarter alone, it posted a loss of about $40 million — its biggest loss in years. To close the gap, the company has been consistently diluting shareholders, something it will have to do if it plans to remain solvent in the near term.
Limited funding leads to SoundHound’s second challenge: a limited ability to ramp up research and development. Dozens of companies are investing heavily in their own voice AI technologies, including most of the big tech giants. SoundHound’s relatively paltry annual research and development spending of $56 million — a decrease from previous quarters — will likely hamper its ability to compete over the long term. For SoundHound to win in this increasingly competitive space, it will need to find a way to significantly expand its access to capital and thus increase spending on research and development. Even if it succeeds, it will likely do so at the cost of dilution to current shareholders.
Does SoundHound have huge potential for upside? Absolutely. And investors looking for maximum growth opportunities should consider this stock over larger, more mature companies like Nvidia. But there are also critical risks that could derail this story. Only investors willing to take on additional risk for additional upside should get involved.
Should You Invest $1,000 in SoundHound AI Now?
Before you buy shares in SoundHound AI, you should consider the following:
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Ryan Vanzo 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.
Forget Nvidia: 1 Artificial Intelligence (AI) Stock You Should Buy Instead was originally published by The Motley Fool