Better Stock AI: SoundHound AI Vs. Snowflake

SoundHound AI (SOUND -0.22%) and Snowflake (SNOW 0.86%) represent different ways to invest in the growing artificial intelligence (AI) market. SoundHound develops AI-based audio and speech recognition tools that can be customized for a wide range of industries. Snowflake’s cloud-based data warehouses are used to collect and clean data from fragmented computing platforms so that it can be easily read by third-party analytics and AI applications.

Bulls initially embraced both stocks. Shares of SoundHound AI started trading at $8.72 after it went public through a merger with a special purpose acquisition company (SPAC) on April 28, 2022, and climbed to a record high of $14.98 about a week earlier late. Snowflake went public at $120 per share in a traditional IPO on September 16, 2020. Its shares doubled to $245 in early trading and rose to a record high of $401.89 in November 2021.

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However, both hot AI games lost their luster as their revenue growth cooled and rising rates compressed their ratings. Today, SoundHound and Snowflake are trading around 70% below their record highs and at deep discounts to their original prices. Should investors buy any of these declining growth stocks as a reversal play?

SoundHound AI still has a lot to prove

SoundHound’s eponymous app identifies songs by hearing a short clip or a few buzzed bars, but it generates most of its revenue from Houndify — a developer platform that allows companies to create custom speech recognition tools. Its clients include car manufacturers such as Hyundaismart TV manufacturers love it Visionfast food chains like Church’s Chicken and other companies that don’t want to share their data with tech giants like Alphabetto Google.

SoundHound’s defensible niche and importance to the AI ​​market attracted attention Nvidiawhich increased its stake in the company earlier this year and integrated its voice recognition tools into its Drive car platform. It also has plenty of other things to iron out: It has expanded its presence in the restaurant sector by acquiring SYNQ3 and Allset, expanding its enterprise AI ecosystem with the recent acquisition of Amelia, and partnering with AI chatbot maker Perplexity to -and modernize. own large language models (LLM).

SoundHound’s revenue grew 47% in both 2022 and 2023. Its revenue is expected to grow at least 74% in 2024 as it integrates its latest acquisitions, then grow more than 88% from this base value to approximately $150 million in 2025.

That outlook is impressive, but it remains deeply unprofitable even after laying off nearly half its workforce last year. Analysts expect adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to gradually improve from negative 78% in 2023 to negative 16% in 2025, but that doesn’t mean its business model is still sustainable. It has also significantly increased its share count by 83% over the past two years with its secondary offerings and large stock-based compensation expenses, and this dilution is a bright red flag for a stock that already trades at 20 times this year’s sales.

Snowflake’s days of hypergrowth are over

Snowflake’s cloud-based data warehouse offers its customers a flexible consumption-based pricing model and is compatible with a wide range of cloud infrastructure platforms. This makes it an attractive option for companies that run their services on multiple cloud platforms and don’t want to lock themselves into a single cloud provider.

The company initially impressed with its meteoric growth. Its product revenue, which makes up the bulk of its top line, grew 120% in fiscal 2021 (which ended in January 2021), 106% in fiscal 2022 and 70% in fiscal 2023. Rate of its net revenue retention, which rates its year-over-year growth per customer over a 12-month period, rose from 168% in fiscal 2021 to 178% in fiscal 2022, but fell to 158% in fiscal year 2023.

However, in fiscal 2024, its product revenue grew by just 38% as its net income retention rate fell to 131%. Product revenue is only expected to grow 24% in fiscal 2025, with declining retention rates. It mainly blamed the slowdown on headwinds, but the sudden departure of its CEO, Dan Slootman, in February and Berkshire Hathawaythe liquidation of its Snowflake stake convinced many investors its high-growth days were over.

Analysts expect Snowflake’s total revenue to grow just 26% to $3.53 billion this year as adjusted EBITDA falls 20% to $280 million. It is also expected to remain unprofitable for the foreseeable future. That’s not an impressive prospect for a stock that still trades at 11 times this year’s sales, but its share count is up just 4% over the past four years and it’s using buybacks to offset dilution. Bulls believe the rapid growth of the artificial intelligence market will drive companies to store more data in Snowflake’s warehouses, but bears believe it may struggle to break even in a market crowded with similar services.

Buy better: SoundHound AI

I wouldn’t rush to buy any of these AI stocks right now. SoundHound still needs to prove that its hypergrowth rates are sustainable, and Snowflake needs to reignite its core growth engines. But if I had to choose one over the other, I’d go with SoundHound over Snowflake because its growth is faster, its groove is wider, and it’s backed by Nvidia’s bellwether AI.