Nvidia Sells Its SoundHound AI Stock: What Should Investors Do?

One of the key reasons for the impressive rise in SoundHound AI (SOUN -5.62%) stock was Nvidia's investment in the company. This association provided SoundHound with significant credibility in the competitive landscape of artificial intelligence (AI). However, this boost is no longer relevant.

Recent disclosures through Nvidia's 13F filing – a report that indicates the investments held by companies managing over $100 million – revealed that Nvidia has sold its entire stake in SoundHound AI. This news led to a sell-off in SoundHound's stock since many investors speculate that Nvidia's decision implies they possess insights not available to the public.

So, is this assumption justified? Or could it represent a potential buying opportunity?

Nvidia's Stake in SoundHound Was Quite Small

It is important to consider the scale of Nvidia's investment in SoundHound. As of December 31, 2024, Nvidia held 1.7 million shares valued at approximately $33.7 million. Although this figure might appear substantial, it is a mere fraction of Nvidia's overall financial picture.

In the last quarter alone, Nvidia generated an impressive $16.8 billion in free cash flow, along with $38.5 billion in cash and short-term investments on its balance sheet. Thus, the decision to divest from SoundHound may not have stemmed from a negative business outlook; it could have simply been a matter of streamlining its investment portfolio.

For SoundHound AI investors, this could be more noise than a significant indicator. However, considering that the stock has already dropped by 45% in 2025, it raises the question of whether this could be a good time to buy.

Growth Potential for SoundHound in 2025

SoundHound specializes in audio recognition software critical for AI models, which indicates a strong potential for growth. The company’s recent financial results support this outlook, with a remarkable 89% increase in revenue during Q3. Investors can anticipate an update regarding Q4 results and the official guidance for 2025 on February 27. Management has provided indications that 2025 will be robust.

During the Q3 earnings call, SoundHound's management offered preliminary guidance for 2025, projecting revenues between $155 million and $175 million. With the expected total for 2024 estimated at between $82 million and $85 million, this suggests the possibility of revenue doubling in 2025. While there is much to be excited about, this growth comes at a significant valuation.

Even with the considerable decline in its stock price, SoundHound remains relatively expensive. The company has not yet reached profitability, requiring potential investors to assess its value based on revenue. Currently, SoundHound's stock trades at 50 times its sales. This is a lower multiple than its earlier valuations but still high compared to much of 2024.

This high price-to-sales ratio may seem excessive. However, it is more understandable given the projected doubling of revenue next year. Still, it's unclear if this is the right moment to invest.

With sound selling pressure on SoundHound shares, many investors seem to be moving on from one of last year's standout performers. If SoundHound's Q4 results do not surpass expectations, further sell-offs may occur post-earnings. After this report, I may reassess my stance on SoundHound as the initial excitement potentially fades, revealing a more stable situation.

Even though significant selling has occurred, patience could serve investors well as the stock might face additional downsides if Q4 results disappoint. For those who have enjoyed substantial gains, it may be prudent to take some profits, especially if they have held the stock for over a year.

Numerous questions remain around SoundHound AI, and investors should exercise caution and patience before diving back in.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

SoundHound, Nvidia, Investment