Better Buy: SoundHound AI or Palantir Technologies Stock?

Two of the most popular AI stocks to invest in right now are Palantir Technologies (NASDAQ: PLTR) and SoundHound AI (NASDAQ: SOUN). Both have been impressive since the start of 2024, with Palantir rising around 650% and SoundHound AI increasing about 365%. Despite their strong performance over the past year and a half, they remain popular stock picks in the AI world.

Is there a better option between the two? After all, these two companies are in entirely different stages.

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Image source: Getty Images.

Both companies have different base businesses

Palantir's AI software is tied to data analytics and can be summed up as data in, insights out. A lot of AI processing happens between those two points, but that's what makes Palantir special. Palantir is also unique because over half its revenue comes from government contracts versus commercial businesses.

SoundHound AI has audio recognition software, which allows AI models to use audio as an input rather than text. The platform has multiple use cases. Some of its most important clients are in the automotive (digital assistant in a vehicle) and restaurant space (drive-thru and over-the-phone ordering).

These two companies may play in the AI space, but they're not competitors. With Palantir's government and commercial reach, I'm giving it the nod here.

Winner: Palantir

SoundHound AI is growing incredibly fast

As we take a look at the finances, it's clear that these are very different businesses. First, Palantir is much larger, generating $883 million in revenue during Q1. That was up 39% year over year -- a strong mark for a company of Palantir's size.

SoundHound AI is much smaller, with Q1 revenue totaling $29 million. However, it's growing must faster, with revenue rising 151% in Q1. One risk with small companies is significant customer concentration, which could be an issue if the top client decides not to do business with them any longer. SoundHound AI used to have this risk, but during Q1, no single customer accounted for more than 10% of total revenue.

SoundHound AI may be smaller, but it's growing significantly faster than Palantir, which gives it more growth potential.

Winner: SoundHound AI

Palantir knows how to turn a profit

As small as SoundHound AI is, it shouldn't surprise anyone that it's deeply unprofitable, as it's still trying to capture market share. Palantir flipped its profitability switch and converted a solid amount of revenue into profits. Because one-time effects can cause a company to be profitable or unprofitable on a net income basis in a quarter, I prefer to look at operating margin when judging a company's profitability, especially when it's just becoming profitable.

PLTR Operating Margin (TTM) data by YCharts

SoundHound AI has a long way to go in this department, and investors must understand it likely won't reach Palantir's profitability level for many years.

Winner: Palantir

Neither stock is particularly cheap

As we examine which stock is a better bargain, it's clear that neither one is particularly cheap. Because we've already established that SoundHound AI is unprofitable, we'll use the price-to-sales (P/S) ratio to value each company.

PLTR PS Ratio data by YCharts

This chart contains a lot of information, but I need to highlight a few key items. First, 106 times sales and 36 times sales are very expensive for nearly any stock in the market. Most software companies trade between 10 and 20 times sales, so both are incredibly expensive compared to their peers.

However, Palantir's 106 times sales makes little sense, especially for its growth rate. A good rule of thumb is that a stock is pretty expensive relative to its growth rate if the P/S ratio is greater than its revenue growth rate. Paying two to three times less than its P/S ratio compared to its growth rate is a much better price to pay. For Palantir, you have to pay two and a half times its growth rate. That's unbelievable, and I feel confident labeling Palantir as overvalued.

SoundHound AI is also expensive, but its P/S ratio is about a fifth of its growth rate, so it could be considered cheap if it keeps up its 150% growth rate.

Winner: SoundHound AI

It's a tied outcome, but is it really?

At a score of two to two, there's no winner here. But I think Palantir's overvaluation is enough of a red flag that investors shouldn't be dabbling in Palantir's stock. Instead, SoundHound AI makes a much better investment. However, investors need to be careful not to overload the stock, as it still presents great risk because of its early stages in reaching scale and profitability.

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