SoundHound vs BigBear.ai: Which AI Stock Will Outperform in 2025?

When looking at artificial intelligence (AI) stocks with market caps of less than $10 billion, two prominent names are SoundHound AI (NASDAQ: SOUN) and BigBear.ai (NYSE: BBAI). Although both started the year with market caps of less than $1 billion, the approximate eightfold increase in SoundHound's stock price so far in 2024 (as of this writing) has pushed its market cap to almost $7 billion.

The question looking ahead is whether investors should stick with SoundHound or if BigBear.ai can make a similar run in 2025. Let's look at some important characteristics of each stock to help determine which will outperform in 2025.

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Voice vs. vision

When it comes to smaller stocks, one of the most important factors in how they perform is the opportunity in front of them.

SoundHound AI is trying to become the leader in AI voice because its technology allows for more natural, conversational interactions by using speech-to-deep-meaning-understanding technology to help recognize a user's intent before they are even finished talking. The company has carved out a strong early niche in the automobile and restaurant industry markets.

It recently acquired a company called Amelia that runs an AI conversational platform focused on helping organizations with tasks such as customer service, employee onboarding, and back-office work. The deal helped SoundHound get into more industries, including retail, healthcare, insurance, and financial institutions.

SoundHound still has a lot of growth opportunities in its main auto and restaurant industry segments, and the stock got a boost earlier this month after announcing that Torchy's Tacos was deploying its AI phone ordering system across all 130 of its locations.

However, the biggest opportunity lies with the company becoming a complete AI commerce voice platform that can answer complicated questions across various industries that have their own jargon and different types of interactions. On that front, market researchers Frost & Sullivan recently named SoundHound's Amelia Conversational AI Platform the leader in the healthcare field, a market it thinks will be a $2.34 billion opportunity by the end of 2027. But there are many markets beyond these that SoundHound can get into, and together, these make up a huge opportunity.

SoundHound has been seeing strong revenue growth, including last quarter when it surged 89%.

BigBear.ai, meanwhile, is focused on the U.S. government defense industry. The company was created through the merger of analytics company BigBear and systems integrator NuWave by private equity firm AI Industrial Partners. Two other analytic companies were later added to the mix, and the company went public via a special purpose acquisition company (SPAC) back in 2021.

The company derives much of its revenue from the federal government, although it also has customers in the manufacturing, life sciences, and logistics industries. It has a number of supply chain and logistics solutions as well as solutions in the cybersecurity, digital identity, automation, and data collection markets.

The company has been a mixed bag operationally. Revenue plunged by 21% in Q1, hurt by the bankruptcy of customer Virgin Orbit and the end of an Air Force contract. However, it regained its revenue momentum in Q3, up 22%, thanks to its recent acquisition of Pangiam.

The acquisition of Pangiam, whose systems often are used in places like airports, is expected to bring technology to BigBear.ai in the areas of facial recognition, image-based anomaly detection, and advanced biometrics. With the deal, the company is looking to have the industry's most comprehensive vision AI portfolio.

Image source: Getty Images.

Margins

In addition to recent revenue growth, another big difference between SoundHound and BigBear.ai is their gross margins. Software and AI companies typically have pretty robust gross margins because once their products are developed, they tend to have low costs for producing and distributing the products.

SoundHound tends to sell its solutions either through a royalty arrangement or through subscriptions. When there is a product involved, such as the sale of an automobile with its solution incorporated in it, then it gets a royalty. Meanwhile, solutions like its AI ordering system for restaurants are sold through subscriptions. Both of these tend to be high-margin revenue streams once they scale.

Last quarter, SoundHound's gross margin was 49%, while its adjusted gross margin was 60%. However, last year, its gross margin was 75% for the full year. The company's goal is to have sustained gross margins of more than 70%.

BigBear.ai, however, only had a gross margin of 25.9% last quarter. Through the first nine months of the year, its gross margin was 25.2%.

The company's gross margins are very low for the type of business it is in. This appears to stem from its history as a government contractor, as its engineers and data scientists within the government vertical often must co-locate and be on-premise. This adds a lot of cost compared to just running a pure software solution.

However, the company is looking to continue to expand its gross margins as it increases its percentage of revenue from software compared to services and expands more into the commercial sector.

Verdict

With stronger revenue growth and much more robust margins, SoundHound AI appears to have a larger opportunity in front of it compared to BigBear.ai. However, the one area where BigBear.ai's stock does have a big advantage over SoundHound Ai is valuation. At a forward price-to-sales (P/S) ratio of just over 3, it is a fraction of the valuation of SoundHound, which is trading at 38 times 2025 analyst estimates after a huge year-end rally.

SOUN PS Ratio (Forward 1y) data by YCharts

I like SoundHound's business more, but the huge surge in the stock price would have me moving to the sidelines at present. Both stocks are a bit speculative, but with the Virgin Orbit bankruptcy behind it and BigBear.ai showing discipline in cutting expenses, I think it is the better option for 2025, as SoundHound has just gotten a bit ahead of itself.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.