SoundHound AI (SOUN 5.77%) and Super Micro Computer (SMCI 8.89%) represent two very different ways to invest in the booming artificial intelligence (AI) market. SoundHound's namesake app is used to identify and discover songs, while its Houndify developer platform enables companies to create their own speech-recognition tools. Super Micro Computer, more commonly known as Supermicro, is a leading producer of AI servers.
Both companies have close ties to Nvidia (NVDA 6.18%). Nvidia was one of SoundHound's earliest backers prior to its public debut in 2022, and it recently made another investment in the company. Supermicro's partnership with Nvidia grants it access to the chipmaker's top-tier data center graphics processing units (GPUs) before most of its competitors.
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That's why both stocks soared alongside Nvidia's as the AI market expanded. Over the past 12 months, SoundHound's stock jumped 248% as Supermicro's stock rallied 1,150%. But should you invest in either of these high-flying AI stocks right now?
SoundHound is a speculative stock
SoundHound competes against Microsoft and Alphabet's Google in the audio and speech-recognition market, but its Houndify platform is an appealing option for companies that don't want to tether themselves to those tech giants.
Automakers like Hyundai and Stellantis, smart TV makers like Vizio, and fast-food chains like Church's Chicken all use Houndify to create custom voice-recognition services. That market should continue expanding as generative AI technologies become more sophisticated. It also recently acquired the restaurant-solutions provider SYNQ3 to expand its ecosystem.
SoundHound went public by merging with a special purpose acquisition company (SPAC) in 2022. Its revenue rose 47% in both 2022 and 2023, and analysts expect its revenue to rise 51% to $69.5 million in 2024.
But based on those expectations and its enterprise value of $2.2 billion, SoundHound's stock still looks pricey at 32 times this year's sales. It's also unprofitable on a generally accepted accounting principles (GAAP) basis, and it doesn't even expect its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to turn positive until 2025. Its high debt-to-equity ratio of 4.3 could also limit its ability to raise fresh cash.
Those issues could limit its upside potential as long as interest rates stay elevated, but it could still carve out a defensible niche in the evolving voice-recognition market and attract some buyout interest from its bigger competitors.
Supermicro is a foundational player in the AI market
Supermicro isn't the world's largest producer of pre-built servers, but it differentiated itself from its larger competitors by building high-performance servers for tougher tasks. That focus made it an ideal partner for Nvidia, which worked with Supermicro to design AI servers which used its high-end data center GPUs. Nvidia's rival AMD has also been working with Supermicro to develop new AI servers for that booming market.
When Supermicro went public back in 2007, it didn't initially gain much attention because the server market was already heavily commoditized. But over the past few years, it became one of the market's hottest growth stocks as the generative AI market exploded and data center operators ramped up their orders of AI servers.
Supermicro's revenue soared 46% in fiscal 2022 (which ended in June 2022) and grew another 37% in fiscal 2023. Analysts expect its revenue to rise 104% in fiscal 2024 as the market's demand for new AI servers consistently outstrips its available supply. For fiscal 2025, they expect revenue to rise another 36% to $19.8 billion.
Supermicro ended its latest quarter with a low debt-to-equity ratio of 0.8. It's profitable, and analysts expect its earnings per share (EPS) to soar 86% in 2024 and 35% in 2025. Its stock still looks reasonably valued relative to those expectations at 37 times forward earnings and 3 times next year's sales. But the AI market needs to keep expanding -- and Supermicro needs to consistently grow its share of the AI server market -- for the company to reach those targets and support its rising valuations.
The better buy: Super Micro Computer
Both of these AI companies are growing rapidly, but Supermicro is clearly a better buy than SoundHound AI. Supermicro has a more established business; it has a wider moat; it's more profitable; and its stock looks cheaper. SoundHound might have gained some fresh attention with Nvidia's investment, but it hasn't proven that its business model is sustainable yet.
