SoundHound AI (SOUN -0.72%) is a leader in conversational artificial intelligence (AI), which is capable of understanding voice prompts and responding in kind. The company's revenue is soaring, but it's burning through significant amounts of cash to fuel its growth.
SoundHound stock has surged by 112% over the past 12 months, catapulting its market capitalization to $4.1 billion. But the stock is very expensive right now, which could put a lid on further upside in the short term and perhaps even lead to a sharp correction.
I predict another AI stock will be worth more than SoundHound by the start of 2026. DigitalOcean (DOCN -1.73%) provides cloud computing services to small and mid-sized businesses (SMBs), but it also has a growing portfolio of AI services that could drive its next phase of growth. DigitalOcean's market capitalization is $2.6 billion as of this writing, so its stock would have to soar by 58% to pass SoundHound's valuation. Here's why I think it will.
Image source: Getty Images.
DigitalOcean is bringing the power of AI to SMBs
The cloud computing industry is dominated by Amazon, Microsoft, and Alphabet, but they focus on serving large organizations with big budgets. DigitalOcean has built a successful business by exclusively targeting SMBs, from those in the start-up phase to those with up to 500 employees, which might feel the bigger providers aren't catering to their needs.
DigitalOcean has a growing portfolio of cloud services, whether businesses need simple data storage and website hosting, or more complex video streaming and software development tools. The company offers cheap and transparent pricing, highly personalized service, and a simple dashboard. It's an ideal set of features for SMBs with small budgets, and especially for those without in-house technical staff.
DigitalOcean is currently adapting its unique business model to help its customers deploy AI. The company operates data centers filled with graphics processing units (GPUs) from Nvidia and Advanced Micro Devices, and it offers fractional capacity, which means SMBs can access between one and eight chips at a time. This is a perfect (and affordable) solution for small AI workloads, like running a customer service chatbot for an online store.
At the start of this year, DigitalOcean also launched a new platform called GenAI, which businesses can use to create custom AI agents. These agents can be trained to serve customers, or even to spot opportunities by analyzing trends in internal sales data. The agents are built on some of the best large language models in the world, from leading developers like Meta Platforms, OpenAI, and Anthropic.
This advanced level of automation used to be reserved for larger organizations with significant financial resources, but DigitalOcean is making it affordable for SMBs.
SoundHound is growing faster, but DigitalOcean is profitable
SoundHound AI generated $29.1 million in total revenue during the first quarter of 2025 (ended March 31), which was a 151% increase from the year-ago period. Demand is surging for its conversational AI software from some of the biggest brands in the world, including Stellantis (the owner of Chrysler, Jeep, and Dodge), Chipotle, Krispy Kreme, and more.
However, SoundHound is burning through cash to fuel its growth. On a non-GAAP (generally accepted accounting principles) basis, which excludes one-off and non-cash expenses, it lost $22.3 million at the bottom line during the first quarter, which was a 10% increase from the year-ago period.
The company has $246 million in cash and equivalents on its balance sheet so it can sustain its losses for a while longer, but profitability will have to become a priority in the next couple of years to avoid the need for a cash injection, which could dilute existing shareholders.
On the other hand, Digital Ocean generated $210.7 million in revenue during the first quarter. It was only a 14% increase from the year-ago period, but it was the second-consecutive quarter in which that growth rate accelerated. Plus, management said the company's AI revenue soared by a whopping 160%, but it doesn't disclose the dollar amount attributable to this part of its business.
While DigitalOcean is growing its revenue at a slower pace than SoundHound AI, it's increasingly profitable, which means its business is on a more sustainable trajectory, especially for investors thinking about the long term. The company's GAAP net income soared by 171% to $38.2 million during the first quarter, and its non-GAAP net income jumped 30% to $55.4 million.
Valuation matters
SoundHound AI stock is currently trading at a price-to-sales (P/S) ratio of 36.6, which is extremely expensive considering shares of Nvidia -- which is the world's biggest and most successful AI company -- trade at a P/S ratio of 23.6. DigitalOcean's valuation is far more reasonable, with its P/S ratio hovering at just 3.5:
SOUN PS Ratio data by YCharts
To put the valuation gap in perspective, DigitalOcean stock would have to soar by 945% in order for its P/S ratio to trade in line with SoundHound's current P/S ratio. I'm not suggesting that will happen, because I think SoundHound's P/S ratio is likely to contract materially from here, especially since it's already trending lower from its peak of over 100.
If SoundHound's P/S ratio fell to 23.6 to match Nvidia's valuation, the company's market cap would shrink to $2.7 billion, which would almost be in line with DigitalOcean's. At the very same time, DigitalOcean's P/S ratio has plenty of scope to rise because it's currently trading at a 35% discount to its three-year average of 5.4:
DOCN PS Ratio data by YCharts
In light of DigitalOcean's rocketing AI revenue, its soaring profits, and its valuation, I think the stock has plenty of upside potential. In contrast, the road ahead might be bumpy for SoundHound stock, so I think DigitalOcean will be the more valuable company before this year is over.
