Two of the most well liked synthetic intelligence (AI) shares heading into 2025 are Palantir Applied sciences (PLTR -3.72%) and SoundHound AI (SOUN -1.16%). Each shares had an outstanding 2024, with Palantir’s refill nearly 400% and SoundHound AI’s gaining almost 900%.
That is almost unheard-of efficiency, and any investor would like to have returns like that. However after a big run-up, is both of those two shares value shopping for proper now?
Each firms are on the slicing fringe of AI deployment
Whereas each firms function within the AI area, Palantir and SoundHound AI aren’t rivals.
Palantir’s focus is to offer purpose-built AI functions for its purchasers, which permits selections to be made with essentially the most up-to-date info attainable. Moreover, Palantir has instruments that permit generative AI integration inside companies’ inside workings, slightly than utilizing it as a device on the facet. Whereas Palantir’s major buyer base is authorities entities, the industrial facet of its enterprise has adopted this subsequent wave of AI a lot quicker. This balanced method between authorities and industrial ought to permit the corporate’s enterprise to proceed benefiting from this AI wave for a very long time.
SoundHound AI’s product is centered round utilizing audio enter for AI fashions. There are almost limitless use instances for this, which is why SoundHound AI has partnered up with among the largest AI gamers, like Nvidia, to combine its refined know-how with others’ merchandise. The principle use instances from SoundHound AI’s software program have been within the restaurant and vehicle industries, nevertheless it has additionally just lately discovered success within the monetary and healthcare sectors.
Each Palantir and SoundHound AI have sturdy enterprise instances, however how are their funds?
SoundHound AI is rising a lot quicker than Palantir
On the monetary facet, it is actually troublesome to match the 2. Palantir is a a lot bigger and worthwhile firm rising at a slower charge consequently (it is a lot tougher for a big firm to grow as quickly as a small firm). SoundHound AI is the precise reverse in all of these features.
In Q3, every firm posted sturdy development, with Palantir’s income rising 30% yr over yr to $725 million, and SoundHound AI’s growing 89% to $25 million. Nevertheless, Palantir posted a powerful 20% profit margin, whereas SoundHound AI’s bottom-line margin was a unfavourable 87%.
Whereas these numbers might trigger buyers to favor Palantir, we’re evaluating these firms for 2025, and so much might change over the subsequent yr. Wall Road analysts anticipate Palantir to develop income by 24% subsequent yr, whereas SoundHound AI’s income is predicted to rise 96%.
That is an enormous distinction, and it exhibits that SoundHound AI’s development is simply getting began, whereas Palantir’s might lower a bit. On the profitability facet, SoundHound AI is not anticipated to make a real revenue in 2025, however administration has famous that they anticipate to realize adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) profitability by the tip of 2025. Whereas that is not actual profitability, it’s a step in the appropriate course.
There is not a real winner on this evaluation both, however there’s one enormous part that we have to talk about with each firms: valuation.
Justifying every inventory’s valuation is troublesome
As talked about, each of those shares are up massively for 2024, but their income or earnings aren’t up by a corresponding quantity. That is as a result of their valuation ratios have skyrocketed.
SOUN PS Ratio information by YCharts
SoundHound AI trades for 92 times sales and Palantir for 75 instances gross sales, making them among the many costliest shares available in the market.
More often than not, after we talk about valuation, 92 or 75 instances earnings constitutes an costly valuation, but these two are buying and selling that top with out contemplating any bills.
However do these value factors make sense?
Palantir is far additional alongside in its firm maturity than SoundHound AI and needs to be aiming for revenue margins of 30%. It’s going to possible commerce round 40 instances trailing earnings. Nevertheless, if Palantir maintains its present 30% development charge (keep in mind, Wall Road expects it to say no to 24% development subsequent yr), it’ll take the inventory almost six years to realize that valuation with no inventory value motion.
That is sky-high expectations, and I am unsure Palantir can meet them.
SoundHound AI is a bit completely different, because it’s doubling its income yr over yr. For instance SoundHound AI can double its income in three years. If it does that, the price-to-sales ratio will fall to round 11.5 by 2027, a extra typical software program firm valuation.
Clearly, both stocks already have huge expectations baked into their stock prices, making any additional inventory value development extra related to hype slightly than precise enterprise outcomes. Nonetheless, if I needed to decide one, I might select SoundHound AI, as its explosive development can extra quickly settle down its valuation multiples in a shareholder-friendly method.