Better Artificial Intelligence Stock: Nvidia vs. SoundHound AI

The enormous demand for artificial intelligence (AI) technology led to many AI-centric stocks getting a boost over the past year. Semiconductor chip maker Nvidia (NASDAQ: NVDA) is a prominent example as its shares skyrocketed an astounding 222% over the past 12 months.

Nvidia isn't the only AI darling. SoundHound AI (NASDAQ: SOUN) is an emerging business focused on "a voice AI platform that exceeds human capabilities," according to the company. Its technology enticed Nvidia to invest in SoundHound AI.

Both of these businesses provide compelling opportunities to invest in the rapidly expanding AI market. However, assessing which is the better AI investment requires evaluating them from different perspectives. After all, they're at separate stages in their business lifecycles.

Nvidia has been around for decades, having gone public in 1999. SoundHound's initial public offering (IPO) was in 2022. Keeping this in mind, let's examine what makes each an attractive AI buy, then assess which is the superior investment.

Nvidia's AI strengths

Nvidia's AI investment appeal stems from soaring demand for its products among cloud-computing customers. The cloud provides the infrastructure for AI systems and can require thousands of leading-edge logic chips. These are specialized semiconductor chips delivering greater computer-processing power and efficiency, perfect for advanced computing such as AI.

Nvidia is among the pioneers of leading-edge logic chips, introducing its graphics processing unit (GPU) in 1999. Today, the company dominates the GPU market, and that has sent sales soaring in the face of AI demand.

The company's revenue in its fiscal second quarter, ended July 28, hit $30 billion, a whopping 122% increase from the prior year. That's just the start of its amazing financials.

Nvidia's Q2 gross margin rose to 75% from 2023's 70%. This indicates its business is more efficiently managing costs compared to last year, enabling Nvidia to retain more profits. As a result, net income rose 168% year over year to $16.6 billion.

Nvidia's future looks bright as well. It estimates fiscal Q3 revenue of $32.5 billion, a 79% jump up from the prior-year's $18.1 billion.

Moreover, demand for Nvidia's new Blackwell architecture, its next-generation platform for advanced computing, is outstripping supply, according to management. The semiconductor giant is ramping up Blackwell production in Q4 and estimates generating billions of dollars in Blackwell sales.

Another factor in Nvidia's favor is that, as AI permeates today's technology-dependent society, IT infrastructure is likely to move toward wider adoption of leading-edge logic chips. Such a trend would provide Nvidia with a huge market for its products. The cloud-computing industry is estimated to reach $676 billion this year.

The case for SoundHound AI

As an emerging AI company, SoundHound's sales growth is a particularly important metric. Rapidly rising revenue illustrates the company's ability to effectively capture customers and expand its nascent business.

In this area, SoundHound is succeeding. Through the first half of 2024, the company generated $25.1 million in sales, up 62% from 2023. And revenue growth is about to accelerate.

The company made some acquisitions this year to expand its presence within the restaurant, finance, insurance, and healthcare industries. Consequently, it expects 2024 revenue to exceed $80 million, up from $45.9 million in 2023.

Outsized sales growth is necessary to keep pace with SoundHound's rising expenses. The company exited Q2 with a net loss of $37.3 million, an increase from the prior year's net loss of $23.3 million.

However, that increase was due in part to acquisition costs. Also, many young tech companies prioritize business growth over profitability. So SoundHound's net loss isn't a red flag at this point.

The company sees its acquisitions taking the next several quarters to integrate. Management stated this will eventually lead to reduced costs as SoundHound moves toward breakeven around the end of 2025 and into 2026.

In addition, Nvidia isn't just an investor in SoundHound, it's a business partner. SoundHound is integrating its tech with Nvidia's automotive platform to provide in-vehicle AI voice-assistant capabilities, even without the internet.

This adds to SoundHound's success in the automotive category. Earlier this year, Stellantis was the first auto company to go into full production with SoundHound's generative AI voice assistant.

Choosing between Nvidia and SoundHound AI

SoundHound possesses plenty of growth potential. It estimates a total addressable market (TAM) of at least $140 billion for its AI products. The TAM adds to the company's attractiveness as an investment so long as it can continue growing its piece of this pie.

But because it's still building its business, investing in SoundHound is for those with a high risk tolerance. The company has yet to prove it can become a durable leader in the voice AI market.

Meanwhile, Nvidia has years of proven success expanding its business. It's currently the world's leading semiconductor company by market cap.

The combination of strong financials and outstanding future-growth prospects, because of AI's need for leading-edge logic chips, makes Nvidia the superior long-term investment over SoundHound in the growing AI market.

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Robert Izquierdo has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.