Comparing Top AI Stocks: Palantir vs. SoundHound AI

As we look ahead to 2025, two leading stocks in the artificial intelligence (AI) sector have caught the eye of investors: Palantir Technologies (PLTR) and SoundHound AI (SOUN). Both companies experienced tremendous growth in 2024, with Palantir's stock soaring nearly 400% and SoundHound AI's remarkable rise of almost 900%.

This kind of performance is rare, and any investor would be thrilled with such returns. However, after these substantial increases, a crucial question arises: Are either of these stocks a good investment opportunity now?

Innovative Approaches in AI

While both companies operate within the AI space, Palantir and SoundHound AI do not compete with each other.

Palantir focuses on developing specialized AI applications for its clients, enabling them to make informed decisions based on the latest available data. Additionally, Palantir offers tools that seamlessly integrate generative AI into businesses rather than treating it as a standalone tool. Although a significant portion of Palantir's clients are government bodies, its commercial side has rapidly embraced the next generation of AI technology. This dual focus on governmental and commercial sectors positions Palantir well to benefit from ongoing advancements in AI.

On the other hand, SoundHound AI specializes in using audio input for its AI models. The potential applications for this technology are extensive, leading SoundHound to partner with industry giants like Nvidia. These collaborations aim to merge SoundHound AI's advanced technology with established products. Currently, SoundHound AI's software primarily sees application in the restaurant and automotive sectors, with growing success in finance and healthcare.

While both companies have compelling business models, how do their financials compare?

SoundHound AI's Rapid Growth Outpaces Palantir

When evaluating the financial performance of both firms, comparisons can be challenging due to their differing sizes and growth rates. Palantir is a larger and profitable company, experiencing steadier growth. In contrast, SoundHound AI is smaller and growing much more rapidly.

In the third quarter, both firms reported substantial growth: Palantir's revenue increased by 30% year-over-year to reach $725 million, whereas SoundHound AI's revenue surged by 89%, totaling $25 million. However, Palantir maintained a healthy profit margin of 20%, while SoundHound AI's profit margin was a negative 87%.

These figures might initially lead some investors to lean towards Palantir. However, keeping an eye on projections for 2025 is essential, as Wall Street analysts forecast Palantir's revenue growth at 24%, while SoundHound AI is expected to see an astonishing 96% increase.

This stark contrast suggests that SoundHound AI's growth trajectory is just beginning, while Palantir's growth might slow down. It's also noteworthy that while SoundHound AI isn't predicted to turn a profit in 2025, management anticipates achieving adjusted profitability by the end of that year, indicating progress.

Neither company emerges as a definitive winner in this analysis, but there's a critical aspect that must be addressed: stock valuation.

Valuation Challenges for Both Companies

Both stocks experienced significant price increases throughout 2024; however, the rise in their revenues or profits has not kept pace with this surge. Consequently, their valuation ratios have escalated dramatically.

Currently, SoundHound AI trades at 92 times its sales, while Palantir trades at 75 times its sales, which positions them among the most highly valued stocks in the market.

Typically, such high valuations—92 or 75 times earnings—suggest an expensive price tag, especially when considering the companies' expenses.

But do these valuations hold up under scrutiny?

Palantir is notably further along its business journey than SoundHound AI and aims for profit margins around 30%. If it maintains its current growth rate of 30% (notably, expected to drop to 24% next year), it would take about six years for Palantir to reach its target valuation with no fluctuation in stock price.

These are high expectations, and it remains uncertain whether Palantir can achieve them.

Conversely, SoundHound AI is experiencing rapid revenue growth. If it can double its revenue in three years, its price-to-sales ratio could drop to about 11.5 by 2027, aligning more closely with typical software company valuations.

Clearly, both stocks are currently priced with enormous expectations. Any future growth in stock prices is likely to be driven more by market enthusiasm than by actual business results. Yet, if a choice must be made, SoundHound AI may be the better bet, given its explosive growth potential, which could help stabilize its valuation more quickly.

Note: This analysis does not constitute financial advice and is intended for informational purposes only.

AI, Stocks, Valuation