Nvidia (NASDAQ:NVDA) has been at the center of attention for two years. While the stock had a loyal fanbase before artificial intelligence chips propelled the company past most tech giants, the company’s success shined a light on many artificial intelligence (AI) stocks.
Nvidia has accumulated shares in several artificial intelligence stocks, and that list became public in a recent filing. Investors rushed to buy shares that were on Nvidia’s list. While it’s exciting to jump on a momentum train and see instant results, investors must also consider the long-term prospects of each company. These are three of the AI stocks Nvidia has invested in.
SoundHound AI (SOUN)
SoundHound AI (NASDAQ:SOUN) offers AI voice solutions to businesses that want to enhance their customer experiences. This technology works in multiple languages and enables real-time customer service. The technology can potentially save businesses a lot of money while allowing SoundHound AI to generate meaningful growth.
Stock investors must always consider an asset’s potential before starting a position or selling shares. However, SoundHound AI is a high-risk stock that is asking a lot from its investors. The stock doesn’t look like a good investment opportunity due to its financials and valuation.
Starting with the financials, revenue increased by only 19% year-over-year in the third quarter of 2023 and has been decelerating for several quarters. The company generated $13.3 million in revenue during the quarter along with $20.2 million in net losses.
The Nvidia news brought this AI stock up by over 60% in a single day, resulting in a valuation of roughly $1 billion. This is the same company that only made $13.3 million in Q3 2023 and had a big net loss. Including the sudden rally, shares are down by 5% over the past year. A 41% drop over the past five years including a 1-day 60% pop offers more perspective into the stock’s risky nature.
Nvidia investing in a company isn’t a bullish indicator. Fundamentals matter at the end of the day, and SoundHound AI is lacking in that area. The company can turn into an acquisition target which would bring up the price, but rumors and speculation aren’t good foundations for a prudent investment.
Nano-X Imaging (NNOX)
Nano-X Imaging (NASDAQ:NNOX) has more than doubled since the Nvidia effect. However, the stock was down by 8% after the hours of the Feb. 16 trading session. That day featured a 36% gain for the stock, and investors are already taking their profits.
Despite the big rally, shares are still down by 40% over the past five years. Sharp revenue deceleration is one culprit to the stock’s decline. Revenue only inched up from $2.4 million to $2.5 million year-over-year in Q3 2023. Despite making only $2.5 million in the most recent quarter, the stock trades to the tune of a $750 million valuation.
The less reliable price-to-sales ratio should scare growth investors with high-risk tolerances. Combine that with high net losses (i.e., $21.4 million in Q3 2023) and the long-term prospects aren’t looking good.
The medical imaging technology company looks significantly overvalued, and a Nvidia investment does not change this truth. Investors may have assumed that AI stocks would follow the success of Nvidia and Supermicro (NASDAQ:SMCI). Supermicro’s was due for a rally given strong financials and a previously low valuation.
SMCI stock now carries more risk and is paramount to understanding the current craze. Artificial intelligence is a revolutionary technology that enables more productivity and high revenue growth for some companies. However, investors have approached AI stocks with irrational exuberance in recent weeks if they have any involvement with innovative artificial intelligence technology. When fundamentals get thrown out of the window, investors can experience meaningful losses.
Arm Holdings (ARM)
Arm Holdings (NASDAQ:ARM) is a semiconductor company that designs core CPU components that chipmakers then use to build their own chips. The firm stands to benefit as AI chips experience heightened demand.
While this company looks better than the other two, Arm Holdings still has a lofty valuation. Total revenue only increased by 14% year-over-year in Q3 FY24. Arm reported these results on Feb. 7 when Supermicro had already reported its exceptional results.
Total revenue for the quarter came in at $824 million and the company expects to generate $3.155 billion to $3.205 billion in revenue in fiscal 2024. However, it’s extremely risky to buy into a company that trades at a $132 billion valuation while projecting $3.205 billion in revenue.
This isn’t a case where the stock previously started out as an undervalued investment. Shares trade at a 45 price-to-sales ratio and an 81 forward P/E ratio. Investors are assuming a lot of risk if they invest in this AI stock at current levels.
On this date of publication, Marc Guberti held long positions in NVDA and SMCI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
