Palantir has been one of the best artificial intelligence (AI) stocks investors could buy since the AI arms race began in 2023. Despite the recent sell-off, the stock is up nearly 2,600% since the start of 2023 -- an absolutely incredible return. Unless you have access to a time machine, there's no going back to capture those gains, and investors must identify other stocks that displayed similar aspects to Palantir to find the next great growth stock.
One that I think could deliver strong growth similar to Palantir is SoundHound AI (SOUN +6.33%). This under-the-radar stock is growing at an incredible pace, and looks like an early stage Palantir. But can it outperform Palantir over the next decade?
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Both companies produce enterprise AI software products
Palantir and SoundHound AI are both artificial intelligence companies developing enterprise solutions for their clients, but they aren't competitors. Palantir's software focuses on AI-powered data analytics and is there to help its clients make the best decisions possible at all times. It also has generative AI-powered agents that can automate some processes that traditionally required data manipulation by a human.
SoundHound AI's product is in a completely different AI realm. Its AI platform is a voice recognition software that can be used to automate human-to-human interactions. This has a wide variety of applications, but some of the biggest use cases so far are in restaurants and automotive assistants. SoundHound AI is also making a push into healthcare, insurance, and financial services. If SoundHound AI's platform can outperform human counterparts, it could be a source of massive optimization within all of those industries, giving it a huge growth runway.
NASDAQ: SOUN
Key Data Points
SoundHound AI's product has one thing in common with Palantir: It's not tailored for a specific industry. Although each one started out serving a particular industry, they evolved their product to meet the demands of a wide variety of clients, allowing Palantir to grow into the giant it is today. If SoundHound AI can achieve similar adoption to Palantir, it will be a huge investment success story.
But will it outperform Palantir over the next decade?
SoundHound AI is growing faster already
During Q3, SoundHound AI delivered impressive growth of 68%. That exceeds Palantir's growth rate of 63%. However, there's a massive size difference. Palantir's Q3 revenue totaled $1.18 billion, while SoundHound AI's was a comparatively puny $42 million. This makes Palantir's growth all the more impressive, but if SoundHound AI can keep this growth rate up for a long time, it will be a very successful stock pick. SoundHound AI's success hinges on how widely its audio recognition software is adopted. If its products are adopted by any company that has a customer service wing and consumers have a positive interaction with them, SoundHound AI could be an impressive winner over the long term.
What sets Palantir and SoundHound AI apart for now is profitability. Palantir's profitability is quite impressive, as it posted a 33% operating margin during Q3. That far exceeds the deep unprofitability levels of SoundHound AI.
SOUN Operating Margin (Quarterly) data by YCharts
Although SoundHound AI is far more unprofitable than Palantir was before 2023, it can still dig itself out of the hole if it makes profits a priority. Palantir did that starting slightly before 2023, and it turned into a wildly successful stock.
If SoundHound AI is to outperform Palantir over the next decade, it will need to improve its operating margin dramatically. That's something that's easier to do at scale, so as SoundHound AI increases its revenue, look for signs of improving profitability.
The last comparison is valuation. Because SoundHound AI is unprofitable, using the price-to-sales (P/S) ratio is the best metric. SoundHound AI trades at a pricey 31 times sales, but that's far cheaper than what Palantir trades for.
SOUN PS Ratio data by YCharts
At 112 times sales, Palantir is one of the most expensive stocks in the stock market, and will have a difficult time living up to expectations. That's a ton of growth priced into the stock already, and even though it's delivering impressive results, it must sustain them for a long time to justify its current price tag.
As a result, SoundHound AI has the potential to outperform Palantir over the next decade if it can improve its margins. If it can do that, then SoundHound AI has a lower valuation starting point and superior growth rates working toward its advantage. SoundHound AI's real success will boil down to how widely its software is adopted by its target clientele and if consumers accept the transition from humans to AI. This is far from a guarantee, but if SoundHound AI can deliver, it will be a huge winner. If its product flops or the consumer rejects AI integration, then SoundHound AI may not be all it's hyped up to be. I think the real answer likely lies somewhere in the middle, but that could still yield a successful long-term stock pick.
