SoundHound AI (SOUN +4.59%) and UiPath (PATH 5.39%) represent two different ways to invest in the growing artificial intelligence (AI) market. SoundHound provides voice and audio recognition tools that aren't tethered to larger tech ecosystems, while UiPath's software robots are used to automate repetitive office tasks.
Yet both stocks have disappointed their early investors. SoundHound went public by merging with a special purpose acquisition company (SPAC) two years ago. The combined company's stock started trading at $8.72, but it's now worth roughly $5. UiPath went public via a traditional IPO three years ago at $56, but it now trades at about $20.
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SoundHound and UiPath both lost their luster as rising interest rates compressed their valuations, highlighted their losses, and drove investors toward more conservative investments. The macro headwinds also throttled the growth of both companies as their customers reined in their spending on sweeping software upgrades. But could one of these out-of-favor AI stocks actually be a good long-term investment right now?
SoundHound faces an uncertain future
SoundHound's namesake app can be used to identify songs, while its Houndify developer platform allows companies to develop their own speech recognition tools that don't send data to a big tech company like Microsoft or Alphabet's Google. It also recently acquired the restaurant solutions provider SYNQ3 to expand that ecosystem.
NASDAQ: SOUN
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SoundHound's customers include automakers like Hyundai, smart TV makers like Vizio, and fast food chains like Church's Chicken. Nvidia also increased its stake in SoundHound earlier this year.
In a pre-merger presentation, SoundHound claimed it could grow its revenue at a compound annual growth rate (CAGR) of 104% from $13 million in 2020 to $110 million in 2023 as it expanded its gross margin from 55% to 77%. However, it only generated $46 million in revenue in 2023 -- representing a CAGR of 52% from 2020 -- as its gross margin reached 75%. It mainly attributed that slower-than-expected growth to the macro headwinds, but it also faces a lot of competition.
SoundHound is still expanding, but it remains unprofitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, even after it laid off nearly half of its workforce last year.
For 2024, SoundHound expects to generate $65-77 million in revenue, which would represent a 42%-68% increase from 2023 and match analysts' expectations for 54% growth. However, analysts only expect it to slightly narrow its adjusted EBITDA loss from $36 million to $32 million. It still had $226 million in cash at the end of the first quarter of 2024, so it can certainly afford to rack up more losses, but its stock isn't cheap at 24 times this year's sales.
UiPath needs to keep pace with the AI market
UiPath's revenue soared 81% in fiscal 2021 (which ended in Jan. 2021) and grew another 47% in fiscal 2022. The pandemic drove more companies to integrate the company's robotic process automation (RPA) tools into their existing software to enter data, process invoices, onboard customers, send out mass emails, and perform other repetitive tasks.
NYSE: PATH
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However, its revenue only rose 19% in fiscal 2023 as it grappled with inflation, rising interest rates, geopolitical conflicts, and other macro challenges. Many investors also wondered if new generative AI platforms -- like OpenAI's ChatGPT -- would render its stand-alone RPA tools obsolete in the future. It also faces intense competition from bigger tech companies like Microsoft and Salesforce, which have both been integrating more RPA tools into their cloud-based enterprise software.
But in fiscal 2024, UiPath's revenue rose 24% as the macro environment gradually stabilized. The company also assured investors that it would keep pace with the evolving AI market by upgrading its own software robots with generative AI features. It believes these smarter robots will automate and analyze tasks at a faster rate than its existing RPA tools.
For fiscal 2025, it expects its revenue to rise 19% to $1.6 billion, which roughly matches the consensus forecast. Analysts also expect its adjusted EPS to grow 18% as it narrows its net loss on a generally accepted accounting principles (GAAP) basis. It ended fiscal 2024 with nearly $1.9 billion in cash, cash equivalents, and marketable securities.
Based on those estimates, UiPath looks reasonably valued at seven times this year's sales and 34 times its forward adjusted earnings. Unfortunately, its valuations could remain compressed as long as interest rates stay high and investors continue to fret over the unpredictable competitive threats from generative AI platforms and bigger tech companies.
The winner: UiPath
I wouldn't rush to buy either of these beaten-down stocks right now, especially when AI leaders like Nvidia and Microsoft are still trading at reasonable valuations. But if I had to choose one over the other, I'd stick with UiPath instead of SoundHound AI -- its growth rates are more stable, its balance sheet looks healthier, and its valuations are lower.
