Breakthroughs in artificial intelligence (AI) technology are transforming several industries. Innovations from mega-cap tech leaders such as Nvidia have opened the door for emerging companies to grab their piece of a major market opportunity.
BigBear.ai (NYSE: BBAI) And SoundHound AI (NASDAQ: SOUND) are two small caps trying to leverage unique AI-powered applications for long-term growth. Let’s take a look at which stocks could be a better buy for your portfolio.
The case for BigBear.ai
BigBear.ai is developing a suite of proprietary machine learning and computer vision technologies into a platform of AI-driven analytical tools.
Solutions in cybersecurity, supply chains and logistics, and autonomous systems have found success in government and commercial markets. The company’s advanced facial recognition and image-based threat detection are used at major airports around the world. BigBear.ai also counts on the US Department of Defense as a customer for its ConductorOS platform.
Ultimately, the appeal of BigBear.ai as an investment is the potential for the company to consolidate its leadership in these specialized areas of AI.
On the other hand, operating and financial results have been marred by weaker than expected momentum. In the second quarter (for the period ending June 30), BigBear.ai’s revenue of $40 million rose just 3.4% year over year, impacted by the timing of certain large contracts.
The other challenge is that profitability remains elusive. The company reported a loss on second-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.7 million, up from a loss of $3.2 million in the same period a year ago. BigBear.ai also has net debt of over $134 million, with no clear path to generating free cash flow in the near term.
These numbers aren’t great, but there are still enough positives in the outlook for investors to remain bullish on the stock. On the bright side, Q2 sales are up 20% from Q1, while management expects full-year sales growth of around 11% from 2023, with an effort to improve margins going forward.
What I like most about BigBear.ai is the pure exposure to AI in a cutting-edge corner of technology. The stock trades at just twice 2024 revenue guidance as a price-to-sales (P/S) ratio. This modest level, which reflects the risks associated with poor earnings performance, could prove a bargain if the company starts generating stronger and more profitable growth.
The case for SoundHound AI
SoundHound AI has emerged as a leader in conversational artificial intelligence, providing voice-enabled applications that allow people to interact with smart devices. The technology is being integrated by automakers for in-vehicle voice commands and generative AI as a core part of their operations.
The company has also expanded into the foodservice industry, including AI voice-activated point-of-sale interfaces that fast food restaurants are increasingly using. Earlier this year, SoundHound acquired Amelia, an enterprise AI software specialist, to accelerate the company’s customer service solutions such as virtual call center automation. The company’s strength is its diverse portfolio of disruptive offerings.
Compared to BigBear.Ai, SoundHound AI’s trends are much more impressive. The company reported 54% revenue growth in the second quarter (for the period ending June 30), with management citing strong customer momentum in its key sectors.
The company expects 2024 revenue growth of approximately 77%, with an initial 2025 forecast of $150 million, implying an even stronger 88% growth rate next year.
At the same time, investors are faced with paying a high premium for shares while SoundHound AI remains unprofitable. The company reported negative adjusted EBITDA of $13 million in the second quarter, with negative free cash flow expected to continue for the foreseeable future. In this case, the stock trades at 20 times full-year revenue guidance as a forward P/S ratio, which only declines modestly to 11 based on the 2025 revenue estimate.
It appears the market is pricing in a growth trajectory for the next decade, which could be justified based on the opportunities, but also sets high expectations. That tricky balance adds to the risks SoundHound AI investors need to consider.
The better buy: SoundHound AI
There’s a lot to like about BigBear.ai and SoundHound AI, both of which may be in the early stages of transformational growth. I recognize the speculative nature of these two small caps, which expect volatility, and I believe SoundHound AI is the better stock to buy today. The high valuation is justified by the company’s stronger growth prospects.
A position in SoundHound AI stock within a diversified portfolio could work for investors with a long-term horizon.
Should you invest $1,000 in SoundHound AI now?
Consider the following before purchasing shares in SoundHound AI:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and SoundHound AI wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $765,523!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns September 30, 2024
Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Better Artificial Intelligence Stocks: BigBear.ai vs. SoundHound AI was originally published by The Motley Fool