Two of the hottest artificial intelligence (AI) stocks heading into 2025 are Palantir Technologies (PLTR -3.72%) and SoundHound AI (Thorn -1.16%). Both stocks had incredible results in 2024, with Palantir’s stock up nearly 400% and SoundHound AI’s stock up nearly 900%.
This is an almost unprecedented performance, and any investor would want that kind of return. But after their big rallies, are either of these stocks worth buying now?
Both companies are at the cutting edge of AI adoption
Although both companies operate in the AI space, Palantir and SoundHound AI are not competitors.
Palantir is focused on providing its clients with purpose-built AI applications that enable them to make decisions based on the most up-to-date information possible. Additionally, Palantir has tools that allow you to integrate generative AI into the internal workings of your enterprise, rather than using it as a side tool. While Palantir’s primary customer base is government, the commercial side of its business is adopting this next wave of AI much faster. This balanced approach between government and commerce should allow the company’s business to continue to benefit from this wave of AI for a long time.
SoundHound AI’s products are centered around the use of audio inputs for AI models. There are nearly limitless use cases for this, which is why SoundHound AI partners with major AI players like Nvidia to integrate its sophisticated technology with other companies’ products. SoundHound AI software’s primary use cases are in the restaurant and automotive industries, but it has also recently seen success in the financial and healthcare industries.
Palantir and SoundHound AI both have strong business cases, but what about their financials?
SoundHound AI is growing much faster than Palantir
In terms of financials, it is very difficult to compare the two. Palantir is a much larger and more profitable company, but as a result it grows at a slower rate (it’s much harder for large companies to grow as quickly as small companies). SoundHound AI is the exact opposite in all of these ways.
Each company posted strong growth in the third quarter, with Palantir’s revenue increasing 30% year over year to $725 million, and SoundHound AI’s revenue increasing 89% to $25 million. However, while Palantir posted a high profit margin of 20%, SoundHound AI’s final profit margin was -87%.
While these numbers may lead investors to favor Palantir, we’re comparing these companies heading into 2025, so a lot could change next year. Wall Street analysts expect Palantir’s sales to increase by 24% next year, and SoundHound AI’s sales are expected to increase by 96%.
This is a big difference and indicates that SoundHound AI’s growth is just beginning, while Palantir’s AI may decline a bit. In terms of profitability, SoundHound AI is not expected to be truly profitable in 2025, but management expects to achieve profitability in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2025. He says he expects to achieve this. It’s not real profitability, but a step in the right direction.
There is no real winner in this analysis either, but there is one big factor that needs to be discussed with both companies. It’s valuation.
Difficult to justify the evaluation of each stock
As mentioned earlier, both of these stocks are up significantly heading into 2024, but their revenues and profits have not increased by a corresponding amount. This is because the evaluation ratio is rapidly increasing.
SOUN PS ratio data by YCharts
SoundHound AI trades at 92 times sales and Palantir at 75 times sales, making it one of the most expensive stocks on the market.
Most of the time, when discussing valuations, 92x or 75x P/E ratios are expensive valuations, and these two companies are trading at those high valuations without any consideration of expenses.
But does the price make sense?
Palantir is a much more mature company than SoundHound AI and should be targeting 30% profit margins. The price/earnings ratio will probably be around 40x. However, if Palantir maintains its current 30% growth rate (remember, Wall Street expects its growth rate to decline to 24% next year), its valuation will decline if there is no change in the stock price. It will take nearly six years to reach that goal.
That’s a very high expectation, and I’m not sure if Palantir can live up to it.
SoundHound AI is a little different, doubling its revenue year-over-year. Let’s say SoundHound AI can double its revenue in three years. If that happens, the price-to-sales ratio will drop to around 11.5 by 2027, a more typical software company valuation.
Clearly, both stocks have already priced in high expectations into their share prices, and any further rise in share price has more to do with hype than actual performance. Still, if I had to choose one, I would choose SoundHound AI. That’s because its explosive growth could cause valuation multiples to fall more rapidly in a shareholder-friendly manner.
