Better Artificial Intelligence (AI) Stock: SoundHound AI vs. Palantir

SoundHound AI (NASDAQ: SOUN) and Palantir Technologies (NASDAQ: PLTR) are two of the most popular AI stocks on the market. Each delivered investors phenomenal returns since the AI arms race began, but it may have given investors some pause as to whether there's more upside with these two.

I think that one is clearly a better buy than the other, and it may come as a surprise as to which company I think has more room to run.

The businesses

SoundHound AI blends audio recognition technology with artificial intelligence, something that has been around for a while with products like Siri and Alexa. However, these models performed poorly, and SoundHound AI's products are a massive improvement over these dated assistants. SoundHound AI's models have started to replace humans taking drive-thru orders and over-the-phone tellers for financial institutions. As the technology progresses, it will replace more interactions, providing efficiency gains for those who adopt SoundHound AI's products.

Palantir offers AI-powered data analytics software that can also deploy AI agents to automatically accomplish repetitive tasks that humans would otherwise need to do. Originally, Palantir's platform started off focused on government technology, but eventually expanded to the commercial side when it saw there was an application for its product on the market. This has provided two substantial growth opportunities for Palantir, and it has taken full advantage of them.

While both companies have excellent products, I'm giving the nod to Palantir here because it has two major client groups that help balance its finances.

Winner: Palantir

Finances

There is a significant difference between the size of these two companies. Palantir is a behemoth and has a market cap of around $440 billion, while SoundHound AI's is a mere $7.5 billion. That's a big mismatch, and investors must keep that in mind while comparing the two.

During Q2, Palantir's revenue totaled more than $1 billion, increasing at a rapid 48% growth rate. That's rapid growth for its size, and makes Palantir one of the most dynamic AI investments available in the market. Furthermore, Palantir is highly profitable and generated a 33% net income margin during the quarter. It's rare to see a company growing as rapidly as Palantir at a profitable level, but that's part of the reason why Palantir has become one of the best-performing stocks on the market.

SoundHound AI generated $43 million in revenue, growing at a 217% rate during Q2. While that's far more rapid than Palantir's growth rate, it comes with a huge caveat. A big contributor to SoundHound's growth rate is the companies that it has acquired. This skews the growth rate metric, and investors should look toward organic growth for a better picture. While management doesn't specifically break this out, it told investors during the conference call that historically, this figure has been 50% or greater, and it expects that growth rate to persist for the "foreseeable future."

While SoundHound AI may have the superior growth rate, it isn't profitable. This shouldn't come as a surprise to investors because it's a small company grabbing as much market share as possible, but with Palantir's similar growth rate and superior profitability, I have to give it the win.

Winner: Palantir

Valuation

Although Palantir is up two categories to zero, it could easily blow its lead in the valuation assessment. Even the best companies can be terrible investments if they're purchased for the wrong price, and this might be the case with both of these companies.

Typically, software companies trade for about 10 to 20 times sales, but both of these stocks trade much higher.

SOUN PS Ratio data by YCharts

SoundHound AI and Palantir are incredibly expensive, but they also get a slight pass from the rule of thumb because most stocks aren't growing revenue at a 50% or greater pace. As a result, setting 30 times sales as a fair valuation level seems more reasonable. Clearly, neither of these stocks is anywhere close to that, but they could grow into it over the next few years.

Should each company maintain its 50% revenue growth rate over the next few years (something that will be much easier for SoundHound AI to do because of its small size), it would take SoundHound AI one and a half years of growth to reach the level, while it would take Palantir three and a half.

That gives SoundHound AI the nod in this category, and makes me believe that it's the better stock pick overall because it has two years where the stock is growing from actual results, rather than making up the growth that's already baked into the stock price.

Winner: SoundHound AI

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.