SoundHound AI: Nvidia, SoftBank Investments Put Into Perspective

seekingalpha02-16

SoundHound AI's stock surged after Nvidia and SoftBank revealed stakes in the company through 13-F filing.The investments from Nvidia and SoftBank are relatively small, however.After a difficult 2023,...

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ckcy
02-16
ckcy
Thank you for the deep insight

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relatively small, however.After a difficult 2023, SoundHound AI's Q4 will be an important quarter for the company after it issued a strong quarterly forecast.Manoj Madusanka/iStock via Getty Images Back in April, I started coverage of SoundHound AI (NASDAQ:SOUN) with a \"Hold' rating, saying while the company had some nice opportunities in the automotive and restaurant verticals but a recent restructuring and its growth rate were two yellow flags. From then until Valentine's Day, the stock was down -25% compared to a 21% gain in the S&P After the stock rose from that initial write-up, I followed that up in June writing that it looked like the company was trading more on AI hype than fundamentals, as its cumulative bookings backlog growth had been decelerating. From then until Valentine's Day, the stock was down -42% compared to a 14% gain in the S&P. In October, meanwhile, I said investors should stay away from the stock as the company had been burning through cash and just took on variable debt that at the time had a robust -13.6% interest rate. Since then, the stock has kept pace with the S&P, gaining 17% versus a 18% increase in the S&P over the same period ending February 14th. However, the stock was soaring on February 15th after it was revealed that Nvidia (NVDA) and SoftBank (OTCPK:SFTBY) had both taken stakes in the firm. Let's catch up on the name. Company Profile As a refresher, SOUN operates a voice AI platform that allows people to have more conversational, natural interactions with devices that have voice-enabled third-party assistants. It uses a speech-to-meaning technology that combines automatic speech recognition with natural language understanding to translate everyday speech into meaning in real-time. This technology helps devices answer more complex questions. Most of SOUN's revenue comes from royalties when its Houndify platform is incorporated into a device, such as an automobile or smart speaker. These royalties can be based on volume, usage, or duration. It also sells subscriptions for services that don't have a physical product that users purchase, such as food ordering. In addition, it has a music recognition app that it plans to monetize through advertising and lead generation. Stock Surges on NVDA and SoftBank Investments Shares of SOUN were skyrocketing after NVDA and SoftBank revealed stakes in the firm through 13-F filings. NVDA disclosed a $3.7 million stake in SOUN. It spent $3.4 million to acquire its position. The purchase was about 0.6% of SOUN's shares outstanding, and represented 1.6% NVDA's investment portfolio. This was the first 13-F the company has ever filed. SOUN was one of five investments the chipmaker revealed in its filing. It spent $115.2 million to take a position in Arm Holdings (ARM), which had risen in value to $147.3 million at the time of the filing. NVDA previously tried to buy ARM from SoftBank, but was unable to due to regulatory hurdles. It also invested $55.3 million in Recursion Pharmaceuticals (RXRX), which was worth $76.0 million at the time of the filing. While a biotech company, the firm says it uses AI to help discovery new drugs. Finally, it took small positions in TuSimple Holdings (TSPH) and Nano-X Imaging (NNOX). Meanwhile, the investment arm of tech giant SoftBank bought 1.07 million shares of SOUN valued at $2.3 million. The investment represented 0.4% of SOUN's shares outstanding and was de minus position for SoftBank. Not surprisingly, investors were excited by this news, pushing up SOUN's stock. However, these investments need to be put into perspective. NVDA is valued at $1.8 trillion and has over $18 billion in cash on its balance sheet. A $3.4 million investment is pretty insignificant for the company. The investment in SOUN was also a little less than what the GPU chipmaker spent on investing in TSP, a struggling self-driving trucking company that announced in December it would wind down its U.S. business to focus on Asia. Outside of ARM, the AI-related companies it invested had questions surrounding them, with more sizzle than substance up until this point. It appears NVDA was making some small speculative bets in the AI space. It is also worth noting that SOUN raised $75 million from a group of investors back in 2017 that included Nvidia GPU Ventures. This was well before the company went public via a SPAC in 2022. SoftBank has long been known for investment arm, but its investment team has made some pretty poor bets in recent years. The most famous is its over $14 billion loss in WeWork, which filed for bankruptcy last year. Its largest position in Alibaba (BABA) has also struggled, with the stock trading below its September 2014 IPO price. At the end of the day, I wouldn't put too much stock in these investments. Both are tiny, and SOUN has previously had a relationship with NVDA. That hasn't helped the company's results recently, and it likely would have been better if NVDA made a direct investment in the company to help it raise some cash and pay off its high-interest debt, and not to buy shares on the open market. SOUN has seen both revenue growth and its cumulative bookings backlog growth continue to decelerate. Revenue has gone from growing 56% in Q1 to only 19% growth in Q3. Meanwhile, its cumulative bookings backlog growth has gone from 46% in Q1 to only 13% in Q3. That's a huge deceleration in growth from a company at such an early stage. The company also burned through -$20.8 million in operating cash last quarter. However, it did offer strong guidance that would see revenue more than double at the high end of its guidance in Q4, going from $9.5 million to $20 million. The company has a lot of contracted backlog in the auto space, but they have an average length of 6.5 years and are back-end weighted. Meanwhile, it has been making nice inroads with the restaurant industry and it has started to expand beyond that vertical with its Smart Answering technology. Valuation SOUN is projected to grow revenue about 49% in 2024 to $69.3 million. Notably, that is down from the $74.1 million in revenue analysts were predicting when I last looked at the stock in October and down from a consensus of $81.2 million when I looked at the stock in June. Based on its closing price on February 14th, SOUN stock was trading at, an EV/Revenue multiple of about 8.4x. At a price of $3.76 where it close on February 15th, it would be valued at a 14x EV/Revenue multiple. For 2025, analysts are projecting revenue to grow 41% to $97.9 million. million. Based on its closing price on February 14th, SOUN stock was trading at an EV/Revenue multiple of about 6 based on the 2025 revenue consensus. At a price of $3.76, it would be valued at a 9.9x EV/Revenue multiple. If SOUN can grow its revenue 40% each of the next few years, it is trading a reasonable valuation, as such growth could command a 15x revenue multiple or more. However, the company would need to start to see a nice revenue growth acceleration from recent quarters to achieve this estimates. Conclusion The fourth quarter will be a big one for SOUN. The company struggled throughout much of 2023 with revenue growth and cumulative bookings growth both meaningfully decelerating throughout the year. Meanwhile, it took on some high-interest debt and restructured the company to save costs. None of which is a great sign for a growth company still in its early stages. However, if SOUN can deliver the big acceleration in Q4 growth it promised and forecast a strong 2024, then it can shift the narrative back to it being a hypergrowth AI company. The company has a strong customer base in the auto world, and it is winning some nice business in the restaurant space. SOUN is a bit of a show me story at the moment. The recent numbers have been lackluster, but there certainly is potential there and its Q4 guidance was strong. The NVDA investment, meanwhile, wouldn't influence me in making an investment decision one way or the other given its size. Given the run-up in the stock, I'm going to keep it a \"Hold.\" If the company guides for 40-50% revenue growth for 2024, I think it will have some nice upside from here even after the recent price surge, but I want to see some progress with the Q4 numbers before jumping in given the surge in the stock price and the struggles it faced throughout 2023.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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