Symbotic (SYM 1.62%) and SoundHound AI (SOUN 5.77%) represent two different ways to invest in the growing artificial intelligence (AI) market. Symbotic develops AI-powered robots for automating large warehouses, while SoundHound develops speech recognition technologies for a wide range of industries.
Both companies went public by merging with special purpose acquisition companies (SPACs) last year. Symbotic started trading at $10.54 last June, and it's more than tripled to about $32. SoundHound started trading at $8.72 last April, but it's only worth $2 a share now.
Let's see why the warehouse play outperformed the audio play by such a wide margin, and if it will remain the better AI-based investment for the foreseeable future.
Image source: Getty Images.
Why did the bulls stick with Symbotic?
Symbotic's platform automates the processing of pallets and cases with fully autonomous robots. It says a $50 million investment in just one of its modules will generate $250 million in lifetime savings over a period of 25 years.
The company's biggest backer is Walmart (WMT -0.08%), which owned more than 60% of the company before its SPAC-backed debut. Walmart is also Symbotic's largest customer, thanks to a deal to automate all 42 of the retailer's regional distribution centers across the U.S. It generated 87% of its revenue from Walmart in the first three quarters of fiscal 2023.
Symbotic also recently partnered with SoftBank (SFTB.Y 1.75%), the Japanese conglomerate that owned the SPAC that it merged with, to launch a new warehouse-as-a-service joint venture called GreenBox, which will exclusively purchase its automation systems from Symbotic through a $7.5 billion contract. Symbotic expects the deal to generate over $500 million in annual recurring revenue (nearly half of its projected fiscal 2023 revenue) once all of those systems come online.
That firm support from Walmart and SoftBank makes Symbotic a promising play on the growth of the global warehouse automation market, which Precedence Research expects to have a compound annual growth rate (CAGR) of 16% from 2023 to 2032. Its revenue rose 136% in fiscal 2022 (which ended last September), and analysts expect its top line to have a CAGR of 61% from 2022 to 2025. That's an impressive growth rate for a stock that trades at 2 times this year's sales.
Symbotic isn't profitable yet, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are still swimming in red ink. But it expects its adjusted EBITDA to turn positive in the fourth quarter of fiscal 2023, driven by its layoffs and cost-cutting efforts earlier this year, and analysts expect it to turn profitable on that basis in fiscal 2024.
Based on those forecasts, its stock looks cheap at 14 times next year's adjusted EBITDA.
Why did the bulls abandon SoundHound AI?
SoundHound's main products include its music recognition app, its voice-powered digital assistant SoundHound Chat AI, and its Houndify developer platform. It also creates tools for custom speech recognition, natural language understanding, and voice search for a wide range of industries.
SoundHound faces a lot of competition in this space from tech giants like Microsoft, Alphabet's Google, and Apple, but the bulls believe it will remain a compelling choice for companies that don't want to tether themselves to one of those big ecosystems. That's why restaurants like White Castle, automakers like Hyundai, and smart TV makers like Vizio have all been integrating SoundHound's services into their products and services.
However, SoundHound still generated 67% of its revenue from its top three customers in 2022. Its revenue rose 47% in 2022, and it expects 39% to 61% growth this year. Analysts expect its revenue to have a CAGR of 48% from 2022 to 2025, while Fortune Business Insights estimates the global speech and voice recognition market could still expand at a CAGR of 25% from 2023 to 2030.
Its stock isn't a bargain at 11 times this year's sales, but its long-term growth potential could support that premium valuation. It could also still be a tasty takeover target for its larger tech rivals.
SoundHound isn't profitable yet. But just like Symbotic, it claims its adjusted EBITDA will turn positive in the fourth quarter of 2023. To achieve that, it laid off nearly half of its workforce earlier this year and continues to aggressively rein in its spending. Analysts expect it to narrow its adjusted EBITDA loss from $73 million in 2022 to $32 million in 2023.
The winner: Symbotic
Both of these AI stocks could climb higher over the next few years, but Symbotic's firm backing from Walmart and SoftBank, its rising adjusted EBITDA, and its low valuations make it a more compelling investment than SoundHound right now.
Investors should keep an eye on SoundHound, but they shouldn't pull the trigger until it meaningfully widens its moat, diversifies its customer base, and stabilizes its adjusted EBITDA margins.
