Artificial intelligence (AI) stocks have been in great demand in 2023, which is not surprising since the rapid adoption of this technology in multiple industries has created immense growth opportunities for many companies.
For instance, Nvidia has been a key beneficiary of the proliferation of AI because the technology created a huge demand for its semiconductors, sending shares of the chipmaker up more than 200% this year. Similarly, shares of C3.ai (AI 0.40%) are up 121% in 2023; it is considered to be a play on AI software, a market that's expected to grow at an annual rate of 36% through 2030.
However, shares of SoundHound AI (SOUN 3.35%) failed to take off this year even though it operates in the lucrative AI software market. The stock is flat in 2023, underperforming the Nasdaq-100 Technology Sector's gains of 40%.
But if you have to choose between SoundHound AI and C3.ai right now to make the most of the AI software market, which one should you be buying? Let's find out.
SoundHound AI has been delivering impressive growth
SoundHound AI is growing impressively thanks to the improving adoption of AI in voice and speech platforms. The company is known for providing tools that help its customers deploy AI-powered conversational assistants, convert text to speech, automatically recognize speech, and design custom wake words, among others.
NASDAQ: SOUN
Key Data Points
SoundHound AI estimates that its total addressable market could reach $160 billion by 2026, driven by the growing adoption of its products in multiple end markets such as automotive applications, restaurants, entertainment, and the Internet of Things (IoT). Management also expects its products to gain traction in new areas such as finance, contact centers, and healthcare, among others.
The company is already scratching the surface of this massive end-market opportunity. It expects to deliver revenue between $43 million and $50 million this year, which would be a 50% jump over 2022's revenue of $31 million. More importantly, SoundHound AI was sitting on a cumulative bookings backlog worth $339 million at the end of the last quarter, up 20% year over year.
Management says that "bookings are derived from committed customer contracts and reflect expected revenue to be realized from those contracts over its life." So, the jump in the bookings backlog suggests a robust future revenue pipeline as the metric increases "as new deals are signed or if existing customers extend."
The strong bookings backlog explains why top-line growth is anticipated to remain solid over the next couple of years as well.
SOUN revenue estimates data by YCharts.
The healthy bookings backlog should help SoundHound AI meet -- or even exceed -- these revenue targets as it converts more of its bookings into revenue. Also, the company should be able to sustain high growth in the long run from its huge addressable opportunity, indicating that it could turn out to be a top AI stock in the long run.
C3.ai's stock jump isn't justified by its numbers
C3.ai stock has won big from the AI hype this year, but its performance has been nowhere near that of SoundHound AI. The company's revenue in the first quarter of fiscal 2024 (ended July 31) increased a modest 11% from the year-ago quarter to $72 million.
NYSE: AI
Key Data Points
The pure-play enterprise AI software provider, which says it provides "over 40 turnkey enterprise AI applications that meet the business-critical needs of global enterprises," expects its full-year revenue to increase just 15% in the current fiscal year to $307.5 million.
The primary reason C3.ai has not been able to capitalize on the AI software market, where it sees a total addressable revenue opportunity worth $791 billion by 2026, is its business model switch.
By deciding to charge customers on a pay-as-you-go basis instead of a subscription model, C3.ai lost future revenue visibility. It was able to lock customers into long-term contracts when it sold its services on a subscription basis. But now, customers only need to pay for its services when they use them, and so they can decide to move away to competing platforms or scale back spending in difficult times.
This explains why C3.ai is witnessing a decline in remaining performance obligations (RPO), a metric that represents the total value of a company's future contracted revenue that is yet to be recognized. RPO stood at $335 million in the previous quarter, down 27% from the year-ago period. The metric increased 58% year over year in the year-ago quarter to $458 million.
So, while C3.ai might believe that the switch in business models could help attract more customers since they won't have to enter into any contract negotiations with the company, the reality is that the change has slowed it down, at least in the short term.
The verdict
SoundHound AI is clearly the better AI play between the two, and the valuation of the two companies will make that clearer. The stock is trading at 10 times sales, which is identical to C3.ai's price-to-sales ratio.
Even though SoundHound AI's performance on the stock market has lagged C3.ai by a big margin, it won't be surprising to see the former turn the tables thanks to its much more impressive growth. That's why investors looking to buy an AI stock should consider SoundHound AI since it appears to be the much better deal of the two with its stronger growth.
