Nvidia Just Sold 1 of Last Year's Best-Performing Artificial Intelligence (AI) Stocks

Nvidia's (NVDA -0.12%) graphics processors (GPUs) for the data center are the gold standard when it comes to developing artificial intelligence (AI). The company has added $3 trillion to its market capitalization over the last couple of years on the back of surging demand for those chips.

Nvidia started spreading some of that wealth by investing in smaller AI stocks at the end of 2023. One of them is a leading developer of conversational AI software called SoundHound AI (SOUN -3.23%), and during 2024, its stock outperformed some of the biggest names in the entire industry with a whopping 835% gain:

Data by YCharts.

Nvidia's latest form 13-F with the Securities and Exchange Commission was released last week, which detailed its holdings as of the end of 2024. SoundHound AI stock was notably missing, sparking a flurry of selling that saw the company lose 28% of its value in a single day on Feb. 14.

We don't know why Nvidia would sell one of last year's best-performing stocks, but should investors also consider trimming their positions in SoundHound?

A leader in conversational AI

The most popular AI chatbots on the market today (like OpenAI's ChatGPT) were originally designed to understand text-based prompts, whereas SoundHound AI has always focused on developing voice-based applications. Its conversational AI products are now used in several commercial settings, from quick-service restaurants to the automotive industry.

SoundHound's Chat AI software is now live in new cars from top manufacturers like Mercedes-Benz and Kia, where it can provide the driver with information on almost any topic on command. Plus, earlier this month, SoundHound released a new feature called Brand Personalities, which gives each manufacturer the ability to customize everything from the voice assistant's response style to its character so it stands out from the competition.

SoundHound also launched the world's first in-vehicle commerce platform in January. It allows drivers to place food orders from restaurants without picking up the phone, and it even syncs with the vehicle's GPS system so it can find the most suitable locations. For example, if you're driving in an unfamiliar city, you can simply ask the assistant to order a pizza from the nearest pizzeria.

Speaking of restaurants, SoundHound's software applications are now used in over 10,000 locations across some of America's most popular chains, including Chipotle Mexican Grill and Papa John's. The company offers AI-powered, automated ordering systems that can be deployed in-store, on the phone, and even in the drive-thru. It also developed a tool called Employee Assist, which can provide workers with instant information about store policies and menu items, powered entirely by voice prompts.

SoundHound is currently expanding into new industries like healthcare, financial services, and insurance, thanks to its acquisition of another conversational AI specialist called Amelia in August last year.

SoundHound's revenue is forecast to soar in 2025

SoundHound AI is scheduled to report its final set of quarterly financial results for 2024 on Feb. 27. The company's previous guidance suggests its revenue for the full year could come in at a record $85 million, representing an 85% increase from its 2023 result. The figure will benefit from the inclusion of Amelia's revenue during the third and fourth quarters, which provided a one-off boost.

The same will be true for SoundHound's forecast for 2025 results because this will be the first full year in which it includes Amelia's financial results as part of its own. The company believes its total revenue could come in at $175 million, which will be a 105% jump from its potential 2024 result.

With that said, SoundHound had an order backlog worth $1 billion at the end of the third quarter of 2024 (ended Sept. 30), which it expects to convert into revenue over the next six years. So, the Amelia acquisition isn't the company's only source of strength right now -- there is clearly significant demand for its existing product portfolio.

One thing Amelia is doing is diversifying SoundHound's revenue streams. During Q3, five different industries accounted for between 5% and 25% of the company's total revenue, whereas 90% of its revenue came from the automotive industry alone in the year-ago period.

SoundHound stock is extremely expensive

Nvidia only owned 1.7 million shares in SoundHound, which would be worth around $19 million based on its stock price of $10.96 as of this writing. Since Nvidia is a $3.4 trillion giant, even a full and complete loss wouldn't have moved the needle, so I doubt it sold SoundHound stock because of its valuation.

With that said, SoundHound stock is trading at a price-to-sales (P/S) ratio of 50 as of this writing, making it substantially more expensive than Nvidia itself:

Data by YCharts.

If we assume SoundHound's 2025 revenue forecast of $175 million proves to be accurate, it places the stock at a forward P/S ratio of just 23.1, which is a little less extreme. Still, it doesn't leave much room for upside unless analysts think an equally strong revenue increase might be in the cards for 2026.

That seems unlikely, though, given that Amelia is making a big one-off contribution to SoundHound's revenue growth in 2025, as I highlighted earlier. That won't be replicable in 2026 because the combined companies will have to rely on organic growth alone.

Even if valuation isn't the reason Nvidia sold SoundHound stock, it's not a bad reason for existing investors to potentially take some money off the table. For investors who don't own the stock, its current P/S ratio is certainly a good enough reason to stay on the sidelines.

The upcoming release of SoundHound's latest financial report on Feb. 27 could offer some fresh insights into the company's vision for the future. Plus, Nvidia is scheduled to report the day before (on Feb. 26), so we might find out why it sold SoundHound.