Forget Nvidia, This AI Growth Stock Might Be a Better Buy

If you are anything like me, you might be tired of hearing about artificial intelligence (AI) chips. While enabling hardware is necessary, it should take a back seat to the real-world use cases of the algorithms it helps to train and run. SoundHound AI (SOUN 0.30%) is interesting because it is helping bring this technology further into mainstream use, and its stock might make a compelling long-term investment.

Why SoundHound AI?

Founded in 2005 and hitting the public markets by merging with a special purpose acquisition company (SPAC), SoundHound AI is a leader in what it calls “conversational intelligence.” It has combined traditional voice recognition software with large language models (LLMs) to disrupt customer service and the restaurant and automotive industries.

By now, most of us have experienced robot customer service. This technology, known as interactive voice response (IVR), has been around since the early 20th century, and it seems to have become ubiquitous after the COVID-19 pandemic. IVRs can be frustrating because of their limited vocabulary and unnuanced communication.

However, LLMs (the technology behind OpenAI’s ChatGPT) can revolutionize this industry through complex, humanlike communication. SoundHound wants to be the company that gives these typically text-based algorithms the words they need to enter people’s day-to-day lives.

A bevy of real-world partnerships

In February, a 13F filing revealed that the legendary chipmaker Nvidia had purchased $3.7 million in SoundHound shares. While this represents a less than 1% equity stake in the company, it is a vote of confidence in SoundHound, its technology, and its leadership team.

Nvidia is also working with SoundHound more directly on products such as Nvidia Drive, an in-vehicle voice platform designed to provide generative AI capabilities in cars, even without internet access. These features could be particularly useful for service and repair-related issues because the algorithm will be trained on the car’s own manual.

Image source: Getty Images.

This year, SoundHound’s voice assistant (which features integrated ChatGPT) went into full production in Stellantis DS vehicles in Europe.

Nvidia also boasts mainstream partnerships in the restaurant industry, where it is working with brands like White Castle, Krispy Kreme, and Jersey Mike’s. The company claims that its systems can take 90% of orders without human help and speed up drive-thru lanes by 10%. This is an obvious opportunity for businesses to unlock efficiencies and save money, especially as government intervention causes wages to rise above the free market level.

Is SoundHound Stock a buy?

At first glance, SoundHound seems to have everything going for it. The company is tackling a disruptive growth opportunity. And its software has already been adopted by many mainstream partners. With that said, SoundHound (like many companies that went public through SPACs) faces one big problem: a lack of business maturity.

While second-quarter revenue grew by an impressive 54% year over year, sales still stand at a modest $13.5 million — far below the typical scale of a public company. Operational losses are also still expanding, up 33% year over year to $22 million in the period.

The good news is that with $200.2 million in cash and equivalents on its balance sheet, SoundHound can sustain its current losses for several more quarters without needing outside sources of capital. However, the company remains highly speculative, and investors may want to wait for its operations to mature before buying the stock.

Will Ebiefung 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.