From the internet to e-commerce to the cloud, businesses and people are trending toward efficiency. In a recently published report, researchers at the International Monetary Fund (IMF) predicted that artificial intelligence (AI) will affect 40% of jobs worldwide. Generative AI is in its early phases, but it is already making its mark on the economy and jobs. Software is taking over a growing number of tedious tasks, and customer service and ordering are becoming more automated. Investors are clamoring to get a piece of the action, but not all the companies in this arena are created equal.
Many of us remember the dot-com bubble and the bust that followed. And we all know what happened after 2021 when tech stock prices became decoupled from fundamentals. Now, a new wave of tech enthusiasm has tech stocks flourishing again, pushing the market to new all-time highs. Consider the performance of the Invesco QQQ Trust exchange-traded fund, which tracks the tech-heavy Nasdaq-100 index.
Many of today's AI companies will be massively successful; others will fade. Here are some key things investors should consider when it comes to two popular AI picks.
Is UiPath stock a good buy?
If you have an office job, you can probably relate to what UiPath (PATH 0.26%) does. Think about your most tedious task and how much time you could save by automating it. UiPath's robotic process automation offerings develop software to handle tasks of this type that previously had to be done manually. For instance, many large companies receive hundreds of invoices daily from vendors via email. They then have employees manually input the information from those invoices into the company's accounts payable database. This process is time-consuming and prone to clerical errors. It's also just one example of a task that can be done better and faster via robotic process automation. Taking such tasks off of the desks of employees can have enormous impacts on productivity and efficiency, as it frees people up to focus on higher-level projects.
Last week, UiPath released results for its fiscal 2024, which ended Jan. 31. Revenues reached $1.3 billion on 24% growth, which accelerated to 31% in fiscal Q4, and annual recurring revenue hit $1.5 billion. After years of unprofitable growth, the company turned profitable in Q4, posting $15 million in operating income. Free cash flow also exploded in 2024, putting UiPath on firm financial footing with $1.9 billion in cash and investments on its books, and no long-term debt.
PATH Free Cash Flow data by YCharts.
UiPath trades for 11 times sales, which is reasonable compared to many other high-flying AI stocks and reflects the risks associated with the AI field. The company's ultimate success will be determined by its ability to grow its customer base and maintain a technological edge.
Is SoundHound AI a good investment?
Voice recognition software can be a game-changer for many businesses. New AI-powered technology can take customers' complex orders at drive-thrus and fast-casual restaurants, or handle more intricate commands in vehicles. Customer service is another area that will benefit tremendously. Imagine calling a company and getting your questions answered without being put on hold. Humans are still necessary to oversee the systems and handle some issues, but effective software can streamline the processes. This is why companies like White Castle are rolling out voice recognition ordering using SoundHound AI (SOUN 5.77%) technology.
SoundHound makes money through subscription fees and royalties when customers use its technology to implement the systems mentioned above. In 2023's fourth quarter, its revenue soared 80% year over year to $17 million. For the full year, revenue grew 47% to $46 million. This revenue growth acceleration is encouraging, and the overall market opportunity for SoundHound is massive. However, this is a young company with significant risks for investors.
First, the company is unprofitable, and free cash flow is negative. This isn't unusual for a tech company in its early stages, but makes the stock a riskier investment. SoundHound shored up its available cash reserves in Q4, ending the period with $95 million on its books, but added debt and issued shares to do it. Hopefully, revenue growth will allow SoundHound to make positive strides in its free cash flow.
The stock also trades at a nosebleed valuation.
PATH PS Ratio data by YCharts.
The recent steep rise in its valuation was partly caused by the market learning that Nvidia has a small stake in SoundHound. But in the wake of that surge, SoundHound stock is an extremely high-risk play. However, this could change quickly if there is a significant pullback. The company has tremendous long-term potential, but investors will need to have patience.
Robotic process automation and voice recognition are changing not just jobs but entire industries, and UiPath and SoundHound are in the thick of it. Still, not all AI stocks are good fits for all investors. UiPath is a more stable company with a reasonable valuation, while SoundHound stock is only suitable for those willing to own high-risk stocks.
