Palantir Technologies (PLTR 3.73%) and SoundHound AI (SOUN 5.77%) represent two different ways to invest in the booming artificial intelligence (AI) market. Palantir's platforms help government agencies and large companies make data-driven decisions. SoundHound develops sound and speech recognition technologies for a wide range of industries.
But over the past 12 months, Palantir has rallied nearly 140% as SoundHound's stock declined more than 10%. Let's see why the former outperformed the latter by such a wide margin -- and if it will remain the better buy for the foreseeable future.
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Palantir's growth is accelerating again
When Palantir went public via a direct listing in Sept. 2020, it initially claimed it could grow its annual revenue by at least 30% through 2025. The bulls cheered as its revenue rose 47% in 2020 and 41% in 2021, but its growth cooled off as rising interest rates and other macro challenges drove companies to rein in their spending.
Its revenue only grew 24% in 2022, and it expects 16% growth in 2023. That slowdown was disappointing, but its year-over-year revenue growth reaccelerated in the third quarter. It expects that acceleration to continue in the fourth quarter.
Management attributes this recovery to the strength of its U.S. commercial unit, which offset the slower growth of its government unit as it grappled with the uneven timing of new contracts. Analysts expect its revenue to rise 19% in 2024.
Palantir wasn't initially profitable on a generally accepted accounting principles (GAAP) basis. But it's now generated GAAP profits for the past four consecutive quarters -- which makes it eligible for a possible inclusion in the S&P 500. If that happens, Palantir's volatile stock could stabilize as it's automatically added to a wide range of funds and ETFs.
The company's stabilizing growth indicates that it's still dominating its niche of mission-critical data mining services. It also suggests its long-term goal of becoming the "default operating system for data across the U.S. government" -- which is already supported by its growing adoption across the U.S. military and government agencies -- isn't a mere fantasy.
SoundHound still has a lot to prove
SoundHound went public by merging with a special purpose acquisition company (SPAC) last April. But like many other SPAC-backed companies, SoundHound disappointed investors by broadly missing its initial growth targets.
Prior to its merger, SoundHound claimed its revenue would rise 41% in 2022 and grow a whopping 245% in 2023. Its revenue actually grew 47% to $31 million in 2022, but it only expects about 39% to 61% growth in 2023. That slowdown invalidates the rest of its lofty long-term guidance for generating $939 million in revenue in 2026.
SoundHound blamed that slowdown on the macro headwinds, but it also faces intense competition from tech giants like Alphabet's Google and Microsoft in the voice recognition market. On the bright side, SoundHound's developer platform remains a compelling alternative for companies that want to control their own data instead of tethering themselves to a tech giant. It could also be a compelling takeover target for those market leaders.
SoundHound is still growing as it locks in customers like Hyundai, Vizio, and White Castle, but it's still unprofitable on a GAAP basis. It's aiming to achieve profitability on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis next year, but it still hasn't proven that it can maintain stable profits while scaling up its business yet.
Which of these stocks is more reasonably valued?
Neither of these stocks is a screaming bargain yet. Palantir trades at 77 times forward earnings and 16 times next year's sales. SoundHound can't be valued by its profits yet, but it trades at six times next year's sales.
Palantir has a clearer future than SoundHound, but a lot of growth has been baked into its valuations. That's probably because it was a favorite stock during the meme stock mania -- which propelled its stock to its all-time of $39 in January 2021 -- and remains a popular growth play for speculative investors. SoundHound closed at a record high of $14.98 during the buying frenzy in AI stocks last May, but its cooling growth and lack of profits caused it to lose its luster as interest rates rose.
I wouldn't rush to buy either of these stocks right now. But if I had to choose one over the other, I'd stick with Palantir because it's already scaled up its business, its growth rates are more stable, and it's finally generating consistent GAAP profits.
