Over the past year, the growth of generative artificial intelligence (AI) platforms like OpenAI's ChatGPT sparked a buying frenzy in many AI stocks. Big winners included Nvidia, which sells the powerful data center GPUs for processing AI tasks, and Microsoft, which owns a major stake in OpenAI.
Some lesser-known AI players also went public by merging with special purpose acquisition companies (SPACs) to capitalize on that bullish trend. Many of these companies initially attracted a lot of interest with their optimistic long-term forecasts, but their stocks collapsed after they broadly missed their own expectations.
Two of those struggling SPAC-backed companies are BigBear.ai (BBAI 2.23%) and SoundHound AI (SOUN 2.28%). BigBear.ai's stock opened at $9.84 after it closed its merger on Dec. 8, 2021, but now trades at less than $2. SoundHound AI's stock started trading at $8.72 upon closing its merger on April 28, 2022, but it now trades at around $5.
Let's see why these two AI stocks plunged -- and if either one is still worth buying.
Image source: Getty Images.
BigBear.ai is trying to rightsize its business
BigBear.ai develops data mining and analytics tools that are used to aggregate information from disparate sources. It provides these services as modules that can be plugged into an organization's existing software infrastructure, and it primarily serves large government agencies and enterprise customers.
Prior to going public, BigBear.ai claimed it could grow its revenue at a compound annual growth rate (CAGR) of 40% from $140 million in 2020 to $388 million in 2023, expand its annual gross margin from 30% to 50%, and keep its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in the high teens.
NYSE: BBAI
Key Data Points
But from 2020 to 2023, BigBear.ai's revenue grew at an anemic CAGR of 3.5% to $155 million. Its annual gross margin also declined to 26% in 2023, while its adjusted EBITDA margin turned negative in 2022 and 2023. It mainly blamed that slowdown on the tough macro environment and the bankruptcy of its major customer Virgin Orbit, but it also seemed like the company had vastly overestimated its own growth potential.
That's why it wasn't too surprising when CEO Reggie Brothers resigned in October 2022. Its new CEO, Mary Long, then focused on cutting costs and rightsizing its core business. Long also oversaw its all-stock takeover of the AI vision technology firm Pangiam earlier this year, and that deal could boost its near-term revenue and expand its ecosystem.
BigBear.ai expects its revenue to rise 26% to 39% this year -- compared to its flat growth in 2023 -- as the macro environment warms up and it integrates Pangiam's business. Its adjusted EBITDA also turned positive in the second half of 2023. Those developments are encouraging and its stock looks cheap at 2 times this year's sales, but there's no guarantee that it can grow its business organically over the next few years.
SoundHound AI's business model looks shaky
SoundHound develops audio and speech recognition tools. Its namesake app can identify songs, while its Houndify platform lets companies develop their own speech tools that aren't tethered to a tech titan like Microsoft or Alphabet's Google.
That flexible approach has locked in a broad range of customers, including automaker Hyundai, smart TV maker Vizio, and fast food chain Church's Chicken. It also recently bought the restaurant solutions provider SYNQ3.
But like BigBear.ai, SoundHound disappointed its investors by missing its pre-merger targets. It initially claimed it could grow its annual revenue at a CAGR of 104% from $13 million in 2020 to $110 million in 2023. It expected its adjusted EBITDA margin to stay negative through 2023, but it planned to expand its annual gross margin from 55% in 2020 to 77% in 2023.
NASDAQ: SOUN
Key Data Points
But it only generated $46 million of revenue in 2023 -- representing a CAGR of 52% from 2020 -- as its gross margin rose to 75%. It largely blamed that slowdown on the challenging macro environment, but it also faces stiff competition from Microsoft, Google, and other tech giants that can afford to provide similar services at lower margins. SoundHound laid off nearly half of its workforce last year, but it doesn't expect its adjusted EBITDA to turn positive until 2025.
In other words, SoundHound hasn't proven its business model is sustainable yet, even though it expects its revenue to rise about 52% this year. It gained some fresh attention after Nvidia scooped up some shares this February, but its stock still looks expensive at 21 times this year's sales.
The better buy: SoundHound AI
I wouldn't rush to buy either of these speculative AI stocks right now. But if I had to choose one, I'd stick with SoundHound for four simple reasons: it's growing faster, its growth is mostly organic, its moat is wider, and it operates at a much higher gross margin. BigBear.ai's stock is cheaper, but I'm not too confident in its long-term growth potential.
