Comparing AI Stocks: Palantir vs. SoundHound AI

As we look toward 2025, two of the most talked-about artificial intelligence (AI) stocks are Palantir Technologies (PLTR) and SoundHound AI (SOUN). Both companies enjoyed remarkable growth in 2024; Palantir's stock surged almost 400%, while SoundHound AI skyrocketed nearly 900%.

This kind of performance is exceptional, and any investor would welcome such impressive returns. However, with such significant increases in price, it's essential to evaluate whether either of these stocks is a good buy at this point.

Innovative Approaches in AI

Although both Palantir and SoundHound AI are key players in the AI industry, they serve distinct functions and are not direct competitors.

Palantir's primary goal is to provide designed AI applications that help clients make informed decisions based on the latest data. The company is also developing tools for seamless integration of generative AI into various business processes, as opposed to treating it as an auxiliary tool. While Palantir has a strong foothold in government contracts, the commercial branch of its operations is rapidly embracing the latest advancements in AI technology. This dual focus on both government and commercial sectors is likely to bolster the company's growth as AI technology continues to evolve.

On the other hand, SoundHound AI specializes in leveraging audio input to develop AI models, which opens up a myriad of applications. To enhance its offerings, SoundHound has forged partnerships with industry giants like Nvidia, integrating its advanced audio technology with other platforms. Initially, SoundHound's software found success in the restaurant and automotive industries, and it has recently expanded its reach into finance and healthcare.

Both companies showcase robust business models, but how do they stack up financially?

Comparative Growth Rates

Comparing the financial metrics of these two firms can be challenging. Palantir is a larger and profitable entity experiencing slower growth, while SoundHound AI represents a smaller, rapidly expanding company.

For instance, in the third quarter, Palantir reported a 30% year-on-year revenue increase, totaling $725 million, while SoundHound AI's revenue climbed by an impressive 89% to reach $25 million. Notably, Palantir also boasts a strong profit margin of 20%, whereas SoundHound AI is currently experiencing a negative profit margin of 87%.

Although these figures might lead investors to favor Palantir, it's crucial to focus on anticipated performance for 2025. Analysts project that Palantir's revenue will grow by 24% in the next year, while SoundHound AI is expected to see a staggering 96% increase. This disparity highlights that SoundHound AI's potential for growth has only begun, whereas Palantir could see a slow down in its revenue growth.

Despite SoundHound AI not being forecasted to achieve actual profitability in 2025, management has expressed optimism regarding attaining adjusted EBITDA profitability by the end of that year, which, while not a full profit, indicates progress.

Valuation Concerns

Determining the fair value of these stocks is another matter. Both Palantir and SoundHound AI have seen their stock prices soar in 2024, but their revenue and profits haven't kept up at the same pace. This situation has led to inflated valuation ratios.

Currently, SoundHound AI boasts a price-to-sales ratio of 92, while Palantir's stands at 75, positioning them among the market's highest-priced stocks. Typically, valuations in the range of 75 or 92 times earnings are considered steep, especially since these figures do not account for any expenses.

The question remains: Are these high price points justifiable? Palantir, being more developed than SoundHound AI, should ideally target profit margins around 30%. If it continues growing at its current rate of 30%, it'll take around six years for its stock to reach that valuation without any price increases. Such lofty expectations may be unachievable.

Meanwhile, with SoundHound AI doubling its revenue annually, if it maintains this trajectory and doubles its revenue over the next three years, its price-to-sales ratio could drop to 11.5 by 2027, representing a more standard valuation for a software company.

In summary, both stocks carry high expectations already priced in, indicating that any further growth may be more driven by market sentiment than actual business performance. However, if forced to choose between the two, SoundHound AI may have the edge due to its rapid growth potential, which could alleviate its inflated valuation in a way that's beneficial for shareholders.

AI, Stocks, Growth