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

Two of the hottest artificial intelligence (AI) stocks heading into 2025 are Palantir Technologies (NASDAQ: PLTR) and SoundHound AI (NASDAQ: SOUN). Both stocks had a phenomenal 2024, with Palantir's stock up almost 400% and SoundHound AI's gaining nearly 900%.

That's nearly unheard-of performance, and any investor would love to have returns like that. But after a significant run-up, is either of these two stocks worth buying right now?

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Both companies are on the cutting edge of AI deployment

While both companies operate in the AI space, Palantir and SoundHound AI aren't competitors.

Palantir's focus is to provide purpose-built AI applications for its clients, which allows decisions to be made with the most up-to-date information possible. Furthermore, Palantir has tools that allow generative AI integration within businesses' inner workings, rather than using it as a tool on the side. While Palantir's primary customer base is government entities, the commercial side of its business has adopted this next wave of AI much faster. This balanced approach between government and commercial should allow the company's business to continue benefiting from this AI wave for a long time.

SoundHound AI's product is centered around using audio input for AI models. There are nearly unlimited use cases for this, which is why SoundHound AI has partnered up with some of the largest AI players, like Nvidia, to integrate its sophisticated technology with others' products. The main use cases from SoundHound AI's software have been in the restaurant and automobile industries, but it has also recently found success in the financial and healthcare sectors.

Both Palantir and SoundHound AI have strong business cases, but how are their finances?

SoundHound AI is growing much faster than Palantir

On the financial side, it's really difficult to compare the two. Palantir is a much larger and profitable company growing at a slower rate as a result (it's much harder for a large company to grow as quickly as a small company). SoundHound AI is the exact opposite in all of those aspects.

In Q3, each company posted strong growth, with Palantir's revenue rising 30% year over year to $725 million, and SoundHound AI's increasing 89% to $25 million. However, Palantir posted a strong 20% profit margin, while SoundHound AI's bottom-line margin was a negative 87%.

While those numbers may cause investors to favor Palantir, we're comparing these companies for 2025, and a lot could change over the next year. Wall Street analysts expect Palantir to grow revenue by 24% next year, while SoundHound AI's revenue is expected to rise 96%.

That's a huge difference, and it shows that SoundHound AI's growth is just getting started, while Palantir's may decrease a bit. On the profitability side, SoundHound AI isn't expected to make a true profit in 2025, but management has noted that they expect to achieve adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability by the end of 2025. While that's not real profitability, it is a step in the right direction.

There isn't a true winner in this analysis either, but there is one huge component that we need to discuss with both companies: valuation.

Justifying each stock's valuation is difficult

As mentioned, both of these stocks are up massively for 2024, yet their revenue or profits aren't up by a corresponding amount. That's because their valuation ratios have skyrocketed.

SOUN PS Ratio data by YCharts

SoundHound AI trades for 92 times sales and Palantir for 75 times sales, making them among the most expensive stocks in the market.

Most of the time, when we discuss valuation, 92 or 75 times earnings constitutes an expensive valuation, yet these two are trading that high without considering any expenses.

But do those price points make sense?

Palantir is much further along in its company maturity than SoundHound AI and should be aiming for profit margins of 30%. It will likely trade around 40 times trailing earnings. However, if Palantir maintains its current 30% growth rate (remember, Wall Street expects it to decline to 24% growth next year), it will take the stock nearly six years to achieve that valuation with no stock price movement.

That's sky-high expectations, and I'm not sure Palantir can meet them.

SoundHound AI is a bit different, as it's doubling its revenue year over year. Let's say SoundHound AI can double its revenue in three years. If it does that, the price-to-sales ratio will fall to around 11.5 by 2027, a more typical software company valuation.

Clearly, both stocks already have huge expectations baked into their stock prices, making any further stock price growth more associated with hype rather than actual business results. Still, if I had to pick one, I'd choose SoundHound AI, as its explosive growth can more rapidly cool down its valuation multiples in a shareholder-friendly manner.

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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.