Better AI Stock: SoundHound vs. Taiwan Semiconductor

It's not difficult to identify artificial intelligence stocks that have experienced significant gains over the past year. A massive spending spree among large tech companies is fueling investments in AI data centers that could reach up to $4 trillion by 2030.

Software companies are benefiting as well, with many companies tapping into a rise in demand for AI services that will help boost productivity and increase cost savings.

Two companies that have seen their share prices surge thanks to all of this AI interest are SoundHound AI (NASDAQ: SOUN), with its shares rising 87% over the past year, and Taiwan Semiconductor (NYSE: TSM), with its price up 44%.

Both are taking a unique approach to AI, but only one is the better AI stock. Here's how the two compare.

Image source: Getty Images.

What SoundHound AI has going for it

Let's start with what SoundHound has going for it. The company utilizes impressive conversational AI technology, which many companies employ across a wide range of industries. For example, Chipotle has implemented SoundHound's conversational AI technology for online ordering in its app, and Hyundai uses it for voice commands on some of its vehicle infotainment systems.

What's more, SoundHound's sales growth is impressive. The company's revenue jumped 68% in the third quarter to $42 million, which beat Wall Street's consensus estimate of approximately $40 million for the quarter. Management also increased sales guidance for 2025 to a range between $165 million and $180 million, the second time it raised its revenue guidance this year.

SoundHound also narrowed its non-GAAP (adjusted) loss per share to $0.03 in the quarter, better than the estimated loss of $0.04 by analysts. With the recent top- and bottom-line beats and an impressive customer list, it's not surprising that SoundHound's share price has surged.

The case for Taiwan Semiconductor

Taiwan Semiconductor, also referred to as TSMC, is the world's leading semiconductor manufacturing company, and it has benefited immensely from tech giants spending hundreds of billions of dollars on AI data centers.

In the company's recently reported Q3, revenue rose by 30% to $33.1 billion, and its earnings increased 39% to $2.92 per American depositary receipt (ADR). TSMC CEO C.C. Wei said on the third-quarter earnings call that AI demand continues to be "very strong" and stronger than management thought it would be just three months ago.

With TSMC taking about 90% of the manufacturing for advanced processors, the company will likely continue to benefit as data center spending reaches a potential $4 trillion in investments over the next five years.

Verdict: Taiwan Semiconductor is the better buy

What's concerning about buying SoundHound's stock right now is that the company is still unprofitable. What's more, SoundHound's stock currently has an astronomically high price-to-sales ratio of 53, much higher than the average P/S ratio of just over 4 for software stocks.

That means investors are paying a very high premium for the company's stock right now, despite its sizable losses.

Meanwhile, Taiwan Semiconductor is already profitable and has a more reasonable valuation, with a price-to-earnings ratio of 32, which nearly matches the average P/E ratio of the S&P 500 index -- and is lower than the average of about 48 for the broader tech industry.

While SoundHound could eventually turn a profit, Taiwan Semiconductor's current profitability and its shares being cheaper relative to its industry make it a better AI stock to own right now.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.