Artificial intelligence (AI) took the investing world by storm. Let's be real. Is there a lot of hype? Sure. Will many of the current hot names end up in the dustbin of history? Probably. But will AI have a huge impact on productivity and the economy and create long-term winning stocks? Absolutely! The key is not to put every egg in one basket and choose investments intelligently. As Peter Lynch (one of the most successful investors ever) said, "Know what you own and why you own it."
Palantir Technologies (PLTR 3.73%)and SoundHound AI (PLTR 3.73%) are two hugely popular names. SoundHound stock exploded on the news that Nvidia (NASDAQ: NVDA) has a small stake. Palantir proved many skeptics wrong by posting five straight quarters of net income in accord with generally accepted accounting principles (GAAP). I'll explore both companies below.
Is Palantir a good stock to buy?
Palantir is one of the original AI names. The stock is also a lighting rod for investors after its 2021 rise and 2022 fall, as shown below.
It has surged again as the AI wave and the company's performance heats up. Palantir helps businesses and governments (defense departments) manage the massive amounts of data they generate. It's one thing to have tons of data, but it's of little use if the organization cannot visualize, analyze, and act on it. This is where Palantir's platforms come in.
For instance, one of its platforms, Gotham, harnesses AI to analyze information in real time for defense and intelligence agencies. Palantir Foundry provides deep insights and analysis for the private sector. Palantir's newest product, aptly named the Artificial Intelligence Platform (AIP), is deployable commercially and for defense. Check out this article for a real-world example of how AIP is used.
Palantir is putting to bed two criticisms. First, the company is entrenched in the defense industry but was slower to be commercially adopted. The commercial marketplace is enormous and crucial to growth. As shown below, commercial sales are taking off.
Source: Palantir.
The U.S. commercial customer count rose 55% year-over-year as well. Total sales in the fourth quarter grew 20% to $608 million.
The second challenge for Palantir was becoming GAAP profitable. The company was widely criticized for its liberal use of stock-based compensation, which kept the bottom line in the red for years and diluted shareholders. Q4 was the fifth straight profitable quarter and the largest profit in Palantir's history at $93 million.
The stock trades for 25 times sales at the moment -- not cheap, but few stocks are in this market. Accumulating shares slowly allows investors to take advantage of dips. Palantir is a larger, more stable, and more profitable company than SoundHound, so it is more appropriate for investors with medium risk tolerance.
Is SoundHound a good investment?
SoundHound AI is a much smaller company than Palantir ($17 million in sales in Q4 compared to $608 million), which means more potential for massive gains but significantly more risk and volatility.
You may have noticed more and more AI voice recognition software taking your order at drive-thru and fast-casual restaurants. The voice assistants in vehicles are also becoming more "intelligent." Many of these use SoundHound technology. Then SoundHound makes revenue from licensing and subscriptions. The addressable market is vast, with additional opportunities in retail, customer service, appointment scheduling, etc. The advantages for businesses in terms of efficiency are huge, and this will drive sales and adoption.
SoundHound's Q4 sales were up 80% year-over-year, and its operating leverage improved significantly, although the company is still unprofitable and not quite cash-flow-positive. Still, market penetration is more critical to its success than profit at this stage. The company reported a cumulative order backlog of $661 million. If achieved, this is revenue that will be recognized over several years.
Even since Nvidia's investment was reported (here's my take on that), the stock has been on a tear, as shown below.
As you can see above, it trades at 42 times sales, but that changes quickly with this dynamic stock.
Which company is the better investment? It depends on the investor. Palantir is profitable, growing, and solid but less likely to go parabolic than SoundHound. SoundHound has tremendous potential but could falter as it is just beginning its journey.
Of course, there's no rule that says you have to own just one (or either).
