Better Artificial Intelligence Stock: SoundHound AI vs. Nvidia

Key Points

• SoundHound's revenue rose 151% in the most recent quarter as the company tapped into the expanding conversational AI market.

• Nvidia is very profitable, leads the AI processor market, and continues to generate impressive sales.

• Nvidia's stock is relatively cheaper than SoundHound's, and the chip company is benefiting from a much broader market opportunity from AI data centers.

• 10 stocks we like better than Nvidia ›

The current artificial intelligence (AI) boom has been the biggest driver of the stock market's gains over the past couple of years, and two companies that have seen phenomenal gains from AI are SoundHound AI (NASDAQ: SOUN) and Nvidia (NASDAQ: NVDA). Shares of SoundHound have soared 310% over the past three years, while Nvidia's stock has skyrocketed 910%.

While both are AI stocks, they each play a unique role in the market, with SoundHound selling conversational AI services and Nvidia designing some of the most advanced processors used in artificial intelligence data centers. With both companies on the cutting edge of AI and their share prices rising, you may be wondering which is likely to be the better AI stock for years to come.

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Here's why the scales tip firmly in Nvidia's favor.

Image source: Getty Images.

Why SoundHound AI stock is soaring

Investors have been drawn to SoundHound because the company is tapping into an expanding conversational AI market that is estimated to be worth $152 billion by 2033. SoundHound's tech can handle a range of tasks, including customer service calls over the phone and ordering meals in the drive-thru, and so far, business has been booming.

The company's revenue jumped 151% in the first quarter (which ended March 31) to $29 million. Investors have also been drawn to the fact that SoundHound doesn't have any debt and has $246 million in cash and cash equivalents.

But it's not all sunshine and rainbows for SoundHound. The company reported a non-GAAP (adjusted) loss of $0.06 per share in Q1, and its gross margins slid to 51%, down from 66% in the year-ago quarter. SoundHound's stock is also expensive following their run-up, with shares currently having a price-to-sales multiple of 46. That's pricey when you consider the average P/S ratio for the internet software sector is about 7.

Some investors have lost their appetite for SoundHound's stock with such a lofty valuation and no profit, causing the company's shares to tumble 36% year to date.

Why Nvidia is the better AI stock

Nvidia has been at the forefront of the AI boom for the past few years because the company's semiconductor designs account for up to 95% of all AI data center processors. The company's dominance in this market has led to phenomenal sales and earnings growth for Nvidia, with revenue rising 69% to $44 billion in the first quarter (which ended April 27) and earnings per share jumping 33% to $0.81.

You'll notice a stark contrast between Nvidia and SoundHound here. While SoundHound's revenue growth is impressive, Nvidia is massively profitable, and SoundHound doesn't have any profit.

What's more, Nvidia likely has more room to run in the AI data center space for years to come. Tech companies are locked into an AI dominance race right now, and that could continue to expand the market to $2 trillion by 2029, according to estimates by Moody's.

To be fair, Nvidia's stock isn't cheap. The company's shares have a price-to-earnings ratio of 51, which isn't exactly a bargain. But Nvidia's stock still looks fairly valued, considering that the semiconductor industry has a P/E ratio of about 64 right now.

With its massive AI data center market potential, soaring revenue and profit, and Nvidia's dominance in the AI processor market, the company's stock still looks like a great investment to hold for years. And with the company's shares relatively well priced, Nvidia easily wins in this AI stock matchup.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's and Nvidia. The Motley Fool has a disclosure policy.