Better AI Stock: BigBear.ai Vs. SoundHound AI

Breakthroughs in artificial intelligence (AI) technology are transforming various industries. Innovations from mega-headed technology leaders Nvidia have opened the door for emerging companies to capture their share of a significant market opportunity.

BigBear.ai (BBAI 1.34%) and SoundHound AI (SOUND) are two small-cap companies trying to leverage unique AI-based applications for long-term growth. Let’s examine which stocks might be a better buy for your portfolio.

Image source: Getty Images.

The case for BigBear.ai

BigBear.ai develops a suite of proprietary machine learning and computer vision technology into an AI-based analytics tools platform.

Solutions covering cybersecurity, supply chains and logistics, and autonomous systems have been successful in government and commercial markets. The company’s advanced facial recognition and image-based threat detection are used in major airports around the world. BigBear.ai also relies on the US Department of Defense as a customer for its ConductorOS platform.

Ultimately, what makes BigBear.ai attractive as an investment is the potential for the company to build on its leadership in these specialized areas of AI.

On the other hand, operational and financial results were affected by weaker than expected momentum. In the second quarter (for the period ended June 30), BigBear.ai’s $40 million in revenue rose just 3.4% year over year, hurt by the timing of certain large contracts.

The other challenge is that profitability remains elusive. The company reported a loss on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.7 million, up from a loss of $3.2 million in the year-ago period. BigBear.ai also has more than $134 million in net debt, with no clear path to generating free cash flow anytime soon.

Those numbers aren’t great, but there’s still enough upside in the outlook for investors to remain bullish on the stock. On a positive note, second-quarter revenue grew 20% sequentially from the first quarter, while management is guiding for full-year revenue growth of around 11% from 2023, with an effort to improve margins going forward .

What I love most about BigBear.ai is the pure exposure to AI in a cutting edge corner of technology. Shares are trading at just twice 2024 earnings guidance as forward price-to-sales (P/S) ratio. That modest level, which reflects the risks associated with weak earnings trends, could prove to be a bargain if the company starts generating stronger, more profitable growth.

The case for SoundHound AI

SoundHound AI has emerged as a leader in conversational artificial intelligence that deals with speech-enabled applications for people to interact with smart devices. The technology is being integrated by automakers for in-vehicle voice commands and generative AI as a core part of its business.

The company has also expanded into the food service industry, including AI-powered point-of-sale interfaces that fast-food restaurants are increasingly adopting. Earlier this year, SoundHound acquired Amelia, an enterprise AI software specialist, to accelerate the company’s customer service solutions, such as virtual call center automation. Indeed, the company’s strength is its diverse portfolio of disruptive offerings.

Compared to BigBear.Ai, the trends from SoundHound AI were much more impressive. The company reported a 54% rise in revenue in the second quarter (for the period ended June 30), with management citing strong customer momentum in its key industries.

The company expects revenue growth in 2024 of about 77%, with an initial forecast for 2025 of $150 million, implying an even stronger growth rate of 88% next year.

At the same time, investors face paying a large premium for the stock while SoundHound AI remains unprofitable. The company reported negative adjusted EBITDA of $13 million in Q2, with negative free cash flow expected to continue for the foreseeable future. In this case, the stock trades at 20 times full-year revenue estimates as a forward P/S ratio, which only narrows modestly to 11 based on 2025 revenue estimates.

The market appears to be pricing in an upward trajectory over the next decade, which could be justified on the basis of opportunity, but also creates a high level of expectation. This complicated balance adds to the risks SoundHound AI investors must consider.

Buy better: SoundHound AI

There’s a lot to like about BigBear.ai and SoundHound AI, which may both be in the early stages of transformational growth. Recognizing the speculative nature of these two small caps with an expectation of volatility, I think SoundHound AI is the better stock to buy today. Its high valuation is justified by the company’s stronger growth prospects.

A position in SoundHound AI stock in a diversified portfolio could work for investors with a long-term time horizon.