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Artificial intelligence (AI) has taken the investment world by storm. Let’s be real. Is there a lot of hype? of course. Will many of the current names be consigned to the dustbin of history? probably. But will AI have a major impact on productivity and the economy, creating long-term winners? absolutely! The important thing is that he doesn’t put all his eggs in one basket and chooses his investments wisely. As Peter Lynch (one of the most successful investors of all time) said, “Know what you own and why you own it.”
Palantir Technologies (PLTR -3.57%)and SoundHound AI (PLTR -3.57%) Two very popular names. SoundHound stock soars on news of Nvidia (NASDAQ:NVDA) I have a small stake. Palantir proved many skeptics wrong, posting its fifth consecutive quarter of net income in accordance with Generally Accepted Accounting Principles (GAAP). We will explore both companies below.
Is Palantir a good stock to buy?
Palantir is one of the original AI names. As you can see below, this stock is also a lightning rod for investors after the 2021 rally and 2022 decline.
It has soared again as the AI wave and the company’s earnings heat up. Palantir helps businesses and governments (Department of Defense) manage the large amounts of data they generate. Having large amounts of data is one thing, but it’s of little use if an organization can’t visualize, analyze, and act on it. This is where Palantir’s platform comes into play.
For example, one of the company’s platforms, Gotham, uses AI to analyze intelligence for defense and intelligence agencies in real time. Palantir Foundry provides deep insight and analysis to the private sector. Palantir’s latest product is aptly named the Artificial Intelligence Platform (AIP) and can be deployed for commercial and defense purposes. Check out this article for a real-world example of using AIP.
Palantir attempts to quell two criticisms. First, although the company has a strong presence in the defense industry, commercial adoption has been slow. The commercial market is huge and essential for growth. As shown below, commercial sales are progressing smoothly.
Source: Palantir.
The number of U.S. commercial customers also increased by 55% year over year. Total sales for the fourth quarter increased by 20% to $608 million.
Palantir’s second challenge was to increase profitability under GAAP. The company was widely criticized for its heavy use of stock compensation, which led to years of deficits in the bottom line and dilution of value for shareholders. The fourth quarter was the fifth consecutive quarter of a profit, with a profit of $93 million, the largest in Palantir’s history.
The stock currently trades at 25x sales, which isn’t cheap, but there are very few stocks in this market. By slowly accumulating stocks, investors can take advantage of declines. Palantir is a larger, more stable, and more profitable company than his SoundHound, making it more suitable for investors with medium risk tolerance.
Is SoundHound a good investment?
SoundHound AI is a much smaller company than Palantir ($17 million in fourth-quarter revenue compared to $608 million). This means that while the potential for huge profits is high, the risk and volatility are significantly higher.
You may have noticed that more and more AI voice recognition software is taking orders at drive-thrus and fast-casual restaurants. Voice assistants in vehicles are also becoming more “intelligent”. Many of these use SoundHound technology. And SoundHound makes money from licenses and subscriptions. The addressable market is vast, with additional opportunities in areas such as retail, customer service, and appointment scheduling. The benefits to businesses in terms of efficiency are huge, which drives sales and adoption.
Although SoundHound’s fourth quarter sales increased 80% year-over-year and operating leverage improved significantly, the company remains unprofitable and cash flow is not very positive. Still, market penetration is more important to success than profits at this stage. The company reported a cumulative order backlog of $661 million. If achieved, this will result in revenue being recognized over several years.
Since the Nvidia investment was reported (here’s my take on it), the stock price has fallen, as you can see below.
SOUN data by YCharts.
As you can see above, it trades at 42 times sales, but that can change quickly in this dynamic stock.
Which company is a better investment? It’s up to the investor. Palantir is profitable, growing, and strong, but it’s less likely to go as parabolic as SoundHound. SoundHound has a lot of potential, but it’s still early in its journey, so there could be setbacks.
Of course, there’s no rule that says you have to have just one (or either).
Bradley Guichard has a position in Nvidia with the following options: Long January 2025 $2 calls on SoundHound AI. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
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