Could SoundHound AI be the next Palantir?

Palantir Technologies (NYSE:PLTR) has been one of the hottest stocks of 2024, up about 275% this year at the time of writing. Those are impressive returns that any investor wants, leading many to hunt for stocks that could be the next Palantir (at least in terms of stock performance).

As exciting as the artificial intelligence (AI) investing space is right now, it’s an excellent hunting ground for finding stocks with huge upside. Many have identified themselves SoundHound AI (NASDAQ: SOUND) as one AI stock with that kind of potential. Could SoundHound AI be the next Palantir?

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SoundHound AI doesn’t try to hide what it does with its name. It has an AI-powered audio recognition platform that helps convert voice input into a format that AI can use as input. This technology is having an impact everywhere and has already found many use cases.

SoundHound AI’s technology has already brought AI to drive-thru windows, in-car digital assistants, and banking. This broad use case is just the beginning for SoundHound AI. As you can imagine, there are countless places where accurate speech input into an AI model would be useful.

This has translated into a booming business for SoundHound AI, even though it is only in the early stages of really seeing its business explode. In the third quarter, SoundHound AI generated $25 million in revenue, an increase of 89% year over year. For reference, Palantir generated $725 million in revenue, so SoundHound AI is much smaller.

One of the biggest investment cases for SoundHound AI is that of SoundHound enormous revenue backlog. This figure comes from the potential revenue that could be recognized if the contracts they’ve signed come to fruition, which isn’t a perfect measure, but it gives investors an idea of ​​how the company could move forward. As of the third quarter, management stated it is “well above $1 billion” over approximately six years. This underlies the huge growth potential of SoundHound AI stock, and it looks like some of that backlog will translate into real revenue by 2025.

Management indicated that 2025 sales will be between $155 and $175 million. Considering that SoundHound AI’s projected revenue for 2024 is $84 million, revenue will double next year. That’s explosive growth, and given SoundHound AI’s lag, it could likely continue even beyond 2025.

Moreover, the size of the income stream is expanding. During last year’s quarter, 90% of sales came from the automotive sector. Now no single sector is responsible for more than 25% of total turnover. At customer level, 72% of revenue last year came from a single customer. This year the largest customer is only responsible for 12% of turnover.

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While SoundHound AI isn’t a “risk-free” stock by any means, that level of industry and customer diversification represents the relative risk of the stock falling.

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In terms of growth, SoundHound AI is starting to look like a stock that might not be just now be the next Palantir, but one that could perform better.

But it is not without risks.

SoundHound AI isn’t a fly-by-night stock that no one has heard of. It is well known and has therefore received a premium rating.

SoundHound AI trades for a very expensive 38 times sales. That’s cheaper than Palantir’s 58 times revenue, but both figures look pretty unreasonable. Make no mistake; These are two incredibly expensive stocks.

However, only SoundHound AI has the growth rate to grow to this valuation; Not Palantir (at least at the moment). If SoundHound AI can maintain its trajectory of doubling its revenue annually for a few years (and has a sufficient backlog to achieve that goal), then the expensive price you pay now may well be worth it in a few years.

As a result, I think SoundHound AI could be a better investment than Palantir if you’re patient with the stock. This is a small-cap stock with high risk, so there will be a lot of volatility. Furthermore, I would suggest keeping the position size small because SoundHound AI could implode as quickly as it rose due to a new competitor or a failed product launch.

SoundHound AI could be an incredible AI investment for 2025, but it comes with a lot of risk, so investors should be aware of that.

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Keithen Drury has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Could SoundHound AI be the next Palantir? was originally published by The Motley Fool