Could Buying SoundHound AI Now Be Like Buying Nvidia in 2023?

Nvidia's (NASDAQ: NVDA) stock has been an absolutely incredible performer recently. Since the start of 2023, it rose by more than 800%. Most investors would be thrilled to own a stock that delivered returns like that, but not every company has the potential. It requires a massive growth catalyst to justify such gains.

SoundHound AI (NASDAQ: SOUN) is one company that could have this potential. It's a key player in one niche of the artificial intelligence (AI) sector, and has a massive backlog for its products.

SoundHound's product is gaining momentum

SoundHound AI's technology can parse human speech and perform various tasks based on what it hears. Among the ways it's already being used most are in processing restaurant orders and improving digital assistants in vehicles, but its capabilities extend far beyond those two use cases.

In the automotive segment, SoundHound partnered with Stellantis; the giant automaker will integrate SoundHound's tech into its vehicles across Europe and Japan. This will give people access to generative AI functions while they're driving -- an improvement from the voice assistants that are available on vehicles today. If SoundHound can win business with other automakers and break into other regions, this segment of its business alone could provide it with a huge amount of growth.

SoundHound also worked with several companies in the restaurant sector to automate telephone and drive-thru orders, which saves restaurants on wages. According to the company, these AI assistants actually outperform humans in terms of order speed and accuracy, so the customer doesn't feel like the experience declined. Some of SoundHound's restaurant customers, among them White Castle and Jersey Mike's, are fairly big, but there's serious room for it to grow if it can capture some of the largest fast-food businesses.

SoundHound AI could achieve even greater success if its solutions are utilized in new applications.

But is that potential enough to make its stock the next Nvidia?

Nvidia has one key advantage that SoundHound does not

In the second quarter, SoundHound generated $13.5 million in revenue, which was up 54% year over year. That's quite small compared to other AI businesses.

However, the key figure investors should focus on is SoundHound's backlog, which totals $723 million. This figure doubled from a year ago, showing that rising demand has outpaced SoundHound's capability to integrate its product with its customers' systems.

This is factoring into SoundHound's current valuation, as Wall Street has high hopes for the company.

SOUN PS Ratio data by YCharts.

Trading at 23 times sales, SoundHound stock already carries a premium valuation. By contrast, Nvidia traded for around 15 times forward earnings at the start of 2023. That was a dirt-cheap price, and also a far cry from the forward earnings ratio of 47 it trades at today.

SoundHound already has a premium price tag, which detracts from its growth potential from here. But if it can mature into a business that generates $100 million in revenue per quarter, Nvidia-like performance for the stock is still possible.

If SoundHound achieved that and carried a valuation of 20 times sales, it would be worth $8 billion, up 370% from its market cap today. That would be a solid return, but still far less than what Nvidia produced.

SoundHound stock's premium price tag may prevent it from delivering Nvidia-like returns from here, but that doesn't mean it won't be a great investment. However, it's a bit of a long shot considering the niche use cases for its product and the company's small size. It could make investors some serious money, but don't expect Nvidia-like returns.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.