On the heels of the worst stock market downturn since 2008, Wall Street appears to have turned the corner. Each major market index has rebounded by 20% or more from their recent bottoms, suggesting the onset of the next bull market -- at least by that measure.
Helping drive the turnaround are recent advances in the field of artificial intelligence (AI) and the potential for significant productivity gains, though estimates vary wildly. Cathie Wood's Ark Investment Management calculates that AI software could fuel $14 trillion worth of economic gains by the decade's end. More conservative prognostications from the minds at Morgan Stanley and Goldman Sachs suggest economic benefits of $6 trillion and $7 trillion, respectively, by 2030.
The potential for gains has investors turning over every stone in search of the stocks best positioned to profit from the AI revolution. Unfortunately, while some stocks will be extremely lucrative, buying others will be more like throwing your money away.
Image source: Getty Images.
Palantir: The original AI expert
Palantir (PLTR -0.64%) is coming up on its third year as a public company. Still, it has a two-decade history of developing AI solutions for U.S. government intelligence agencies and U.S. allies. Its success was born of the ability to gather siloed data from various private and public databases and run the information through AI algorithms to track terrorists. Palantir quickly pivoted to apply these same solutions to enterprises, thereby supplying businesses with actionable data.
The company's recent results help illustrate why its opportunity is just beginning. For the second quarter, Palantir generated revenue of $533 million, up 13% year over year, resulting in earnings per share (EPS) of $0.01, swinging from a loss of $0.09 per share in the prior-year quarter. This marked the third consecutive quarter of profitability, a trend it expects to continue in the coming quarter and for the full year.
In Palantir's shareholder letter, management noted that after just three months, its Artificial Intelligence Platform (AIP) -- which layers generative AI on top of the company's existing AI tools -- had attracted more than 100 organizations, and demand was "unlike anything we have seen in the past twenty years." It went on to say the company was (emphasis mine) "in discussions with more than 300 additional enterprises to deploy AIP within their organizations."
Palantir also raised eyebrows as management increased its full-year guidance and said, "As a result, we anticipate that we will become eligible for inclusion in the S&P 500 after we report our financial results for Q3 2023 in early November." To cap it all off, Palantir announced a $1 billion share buyback.
The combination of Palantir's long and successful operating history, improving financial results, and ability to capitalize on the opportunity presented by AI make it a stock to buy hand over fist.
SoundHound AI: This one's for the dogs
Given the stampede to capitalize on the ongoing AI boom, it seems only natural that investors might be interested in checking out SoundHound AI (SOUN 8.52%). After all, the company is a voice AI platform focused on delivering high-quality conversational experiences to businesses' customers. SoundHound's platform provides a suite of tools to help companies build customer-centric chatbots, using speech recognition, natural language understanding, wake words, custom domains, text-to-speech, embedded voice solutions, and more.
Sounds good, right? Not so fast. A quick look under the hood shows why I'm staying far away from SoundHound's stock..
You'd think that a company in the thick of an AI-inspired boom would scramble to keep up with demand, but its recent financial results paint a very different picture. In the second quarter, SoundHound AI generated revenue of $8.8 million, up 42% year over year, resulting in a net loss of $21.9 million, up 28%. That seems pretty respectable at first glance, but there are challenges just under the surface.
There's been a mad dash this year to adopt AI systems, and SoundHound just delivered its slowest rate of growth since its first quarter as a public company in early 2022. This suggests that its growth is fizzling out just as the AI revolution kicks off, and SoundHound has been unable to capitalize on the ongoing boom cycle.
A look at the company's outlook shows SoundHound isn't expecting business to pick up much. The company's forecast calls for revenue growth of 49% at the midpoint of its guidance.
Most concerning, however, is SoundHound's cash situation. The company burned through $34 million of negative cash from operations in the second quarter, bringing the total cash outflows for the first half to $48 million. SoundHound had just $130 million in cash on its balance sheet as of Jun. 30. This is after the company raised $100 million in "minimally dilutive" debt financing in April and $43 million through its committed equity facility in the second quarter.
SoundHound's losses continue to mount, though the company has been making progress on that front. Still, its cash position is precarious at best. This serves to buttress my argument that this is stock best left alone.
I might reconsider if SoundHound manages to generate a profit and improve its cash flow situation. But for now, I wouldn't touch this AI stock with a 10-foot pole.
Full disclosure
I'd be remiss if I didn't address the elephant in the room -- the valuation of these stocks. As of this writing, Palantir and SoundHound AI are currently trading for 12 times and 5 times next year's sales, respectively.
On the surface, it seems that SoundHound is the better buy. However, there's an old adage that seems appropriate here: You get what you pay for. Based on the recent financial results, SoundHound is the riskier of the two. Given the company's deteriorating top-line growth and continuing cash burn, there's a higher degree of risk.
While Palantir is the more expensive of the two, it's a clear choice in my book. Palantir has already made the jump to profitability, marking its third consecutive quarter in the black.
On the other hand, Palantir has expanded its market beyond its intelligence community roots, developing enterprise solutions that are only just now beginning to pay off.
