Better Artificial Intelligence Stock: BigBear.ai vs. SoundHound AI

The emergence of artificial intelligence (AI) into the mainstream propelled the value of many AI-related stocks. Some may already be too expensive to buy now. But there are AI stocks out there that still may hold significant upside. Two of those are BigBear.ai (NYSE: BBAI) and SoundHound AI (NASDAQ: SOUN).

BigBear.ai is an analytics firm using artificial intelligence to analyze an organization's data and help it make better decisions based on that data. SoundHound offers an AI-powered voice platform that can understand human speech in 25 languages.

But just because these companies have AI in their names doesn't mean they're a buy. To decide which AI investment is superior, let's examine them individually.

BigBear.ai's pros and cons

BigBear.ai offers analytics technology used in various situations across a broad range of industries. For instance, the company secured a five-year, $165 million government contract in October to help the U.S. Army transition into a data-driven military.

In another example, the Denver International Airport implemented BigBear.ai's biometric verification software this year to capture images of travelers and automatically verify their identities.

Along with these customer wins, BigBear.ai acquired Pangiam in March. Pangiam develops facial recognition and biometrics technology and strengthens BigBear.ai's capabilities in this area, which the company calls "one of the fastest growing categories for the application of AI."

The combination of customer wins and its Pangiam acquisition boosted revenue. In the third quarter, BigBear.ai grew sales 22% year over year to $41.5 million.

Despite the revenue growth, BigBear.ai is not profitable. It suffered a net loss of $12.2 million in Q3. It also holds nearly $196 million in debt.

A look at SoundHound AI

SoundHound's technology, too, is relevant across a broad spectrum of industries. It can, for example, answer customer service phone calls and take food orders. Elsewhere, car manufacturers, such as Stellantis, have adopted SoundHound's AI voice system, to provide voice-activated features in cars.

SoundHound, like BigBear.ai, made acquisitions to boost its business. Earlier this year, the company acquired AI firms SYNQ3 and Amelia, the former to expand its footprint in the restaurant industry, the latter to extend into new industries, including healthcare and retail.

This led to 89% sales growth in Q3 to $25.1 million. The acquisitions allowed SoundHound to diversify its revenue substantially, putting it on better financial footing.

In Q3 last year, 90% of its revenue came from the automotive sector with 72% coming from a single customer. If that customer had left, SoundHound's business could have collapsed. Now, that customer represents 12% of revenue.

Also like BigBear.ai, SoundHound isn't profitable. Its Q3 net loss totaled $21.8 million. But its Q3 debt was less than $40 million. Earlier this year, it paid off a debt of $100 million.

Choosing between BigBear.ai and SoundHound AI

Although neither BigBear.ai nor SoundHound is profitable, up-and-coming tech companies are known for sacrificing profits to expand their businesses as fast as possible. So, a lack of profitability isn't a concern as long as these AI firms deliver outsized revenue growth.

In BigBear.ai's case, its Q3 sales were strong, but year to date, its revenue is down from $114.6 million in 2023 to $114.4 million in 2024. Its struggle to increase revenue year over year, coupled with a significant debt burden, is not a good sign for a tech company operating in the hot AI sector. Meanwhile, SoundHound sales through three quarters were up 75% year over year to $50.2 million.

BBAI Revenue (TTM) data by YCharts.

Another factor to consider is each's 2024 financial outlook. In March, BigBear.ai originally forecasted at least $195 million in revenue for this year. When it announced Q3 results on Nov. 5, management reduced that estimate to $165 million.

SoundHound updated its 2024 revenue outlook after releasing Q3 earnings on Nov. 12, but in the opposite direction. Before its acquisitions, the firm forecast a minimum of $63 million in 2024 sales, then upped that to $80 million after the acquisitions. It now expects to reach at least $82 million in 2024 revenue.

With SoundHound's sales growing at a substantial clip, it's the better AI investment over BigBear.ai. That said, investing in either stock is not for the faint of heart.

The share prices of both companies are highly volatile, as demonstrated by their high beta of about three. This means their stocks add volatility and risk to the typical stock portfolio.

So although SoundHound is the better choice of these two AI companies, its business is still in the early stages, and since it went public in 2022, little historical performance exists to gauge whether it can succeed over the long haul. Therefore, SoundHound stock is only for investors with high risk tolerance.

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Robert Izquierdo has positions in SoundHound AI. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.