Better AI Stocks: BigBear.ai Versus SoundHound AI

Over the past year, the development of generative artificial intelligence (AI) platforms such as OpenAI's ChatGPT has triggered a buying frenzy for many AI stocks. The big winners include companies that sell powerful data-centric GPUs for processing AI tasks, such as OpenAI's ChatGPT.Nvidia), as well as OpenAI's majority-ownedMicrosoftThe

A number of lower-profile AI companies have also capitalized on this bullish trend by going public with Special Purpose Acquisition Companies (SPACs). Many of these companies initially attracted a lot of interest with their optimistic long-term forecasts, but their stocks collapsed after significantly underperforming their own expectations.

BigBear.ai (NYSE: BBAI)respond in singingSoundHound AI (NASDAQ resonance code: SOUN)Two of these struggling SPAC-backed companies are BigBear.ai, whose shares opened at $9.84 on December 8, 2021 after the completion of the郃, but now trade for less than $2. SoundHound AI, whose shares opened at $8.72 on April 28, 2022 after the completion of the郃, now trades for about $5.

Let's take a look at why these two AI stocks are plummeting - and whether either one is still worth buying.

BigBear.ai tries to adjust the business model

BigBear.ai develops data mining and analytics tools to aggregate information from different sources. It provides these services in modules that plug into an organization's existing software infrastructure, primarily serving large government agencies and corporate clients.

Prior to its IPO, BigBear.ai claimed a compound annual growth rate (CAGR) of 40% in revenue, from $140 million in 2020 to $388 million in 2023, an annual gross margin of 30% to 50%, and adjusted EBITDA in the mid-teens.

However, from 2020 to 2023, BigBear.ai's revenues grow at a compound annual growth rate of only 3.5% to just $155M. Its annual gross margin also declined to 26% in 2023, and adjusted EBITDA margin turned negative in 2022 and 2023. The company blamed a tough macro environment and the bankruptcy of its major customer, Virgin Orbit, as the main reasons for the slowdown, but it also appears to have significantly overestimated its growth potential.

Therefore, it was not a big surprise when Reggie Brothers, the mat executive, stepped down in October 2022, and the new mat executive, Mary Long, then focused on cutting costs and restructuring the core business. New Mat Executive Mary Long has since focused on cutting costs and realigning the core business. Earlier this year, Long also oversaw the company's all-stock acquisition of Pangiam, an artificial-intelligence cybernetics company, a deal that could boost near-term revenue and expand its ecosystem.

With the macro-environmental correction in Nun and the revamping of its Pangiam business, BigBear.ai expects revenue to grow by $26% to $39% this year, while growth will be flat in 2023. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will also turn positive in the second half of 2023. These developments are encouraging, and its stock price at 2x this year's sales looks cheap, but there is no guarantee that it will realize organic growth in the business over the next few years.

SoundHound AI's Business Model Looks Shaky

SoundHound develops audio and voice recognition tools. Its eponymous app recognizes songs, and its Houndify platform allows companies to develop their own voice tools without being constrained by theMicrosoftmaybeAlphabet of tech giants like Google.

This approach has attracted many customers, including automobile manufacturers.modern timesManufacturer of intelligent electrical appliances, smart appliancesVizio It also recently acquired restaurant solutions provider SYNQ3.

But like BigBear.ai, SoundHound failed to meet its pre-labeling goals, much to the dismay of investors. The company initially claimed that its annual revenue would grow at a compound annual growth rate of 104%, from $13 million in 2020 to $110 million in 2023. It expects its adjusted EBITDA margin to remain negative through 2023, but it plans to increase its annual gross margin from 55% in 2020 to 77% in 2023.

But with gross margins rising to 75%, the company generated only $46 million in revenue in 2023, representing a compound annual growth rate of 52% compared to 2020. soundHound attributes much of the slowdown to the tough macro environment, but it also faces stiff competition from Microsoft, Google and other tech giants that are able to offer similar services at lower margins. soundHound laid off half of its employees last year, but doesn't expect adjusted EBITDA until 2025. SoundHound laid off nearly half of its workforce last year but doesn't expect to turn around its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) until 2025.

In other words, SoundHound has yet to prove that its business model is sustainable, even though it expects revenue to grow about 52% this year, and while the company gained some new attention in February when Nvidia acquired a partial stake in SoundHound, its shares are still trading at a high of 21 times this year's sales.

Better Choices SoundHound AI

I wouldn't rush to buy either of these speculative AI stocks right now. But if I had to pick one, I'd go with SoundHound for one simple reason: it's growing faster, its growth is largely organic, it has a wider moat, and it has a higher gross margin. bigBear.ai is cheaper, but I'm not so confident in its long-term growth potential.

Should you invest $1,000 in BigBear.ai right now?

Before buying shares of BigBear.ai, consider the following:

Motley Fool Stock AdvisorThe analyst team has just named what they believe to be the best value for investors.10Only the stock ...... and BigBear.ai were not included. The 10 stocks that made the list could generate huge returns in the coming years.

Stock AdvisorIt provides investors with an easy-to-understand blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. Since 2002, StockAdvisorThe service has more than doubled the return on the S&P 500 Index.

View 10 stocks only

*Stock Advisory Rates as of April 8, 2024

Alphabet executive Suzanne Frey is a member of The Motley Fool's board of directors. leo Sun has no position in any of the stocks mentioned above. the Motley Fool holds recommendations for Alphabet, Microsoft, and Nvidia. the Motley Fool recommends the following options: Microsoft January 2026 $395 Call Options Long and Microsoft January 2026 $405 Call Options Short. the Motley Fool has a disclosure policy. The Motley Fool recommends the following options: Microsoft January 2026 $395 Call Options Long and Microsoft January 2026 $405 Call Options Short. The Motley Fool has a disclosure policy.

Better AI Stocks: BigBear.ai vs. SoundHound AI was originally published by The Motley Fool.