Better AI Stocks: BigBear.ai vs. SoundHound AI

Breakthroughs in artificial intelligence (AI) technology are transforming industries. Innovations from large-cap technology leaders like Nvidia have opened the door for emerging companies to capture a slice of significant market opportunities.

BigBear.ai (BBAI 1.34%) AND SoundHound AI (VERB) are two small-cap companies that are trying to leverage unique AI-powered applications for long-term growth. Let’s take a look at which stocks could be a better buy for your portfolio.

BigBear.ai case

BigBear.ai develops a suite of proprietary machine learning and computer vision technologies into a platform of AI-powered analytics tools.

Solutions spanning cybersecurity, supply chains and logistics, and autonomous systems have achieved success in government and commercial markets. The company’s advanced facial recognition and image-based threat detection solutions are used at major airports around the world. BigBear.ai also counts on the US Department of Defense as a customer of the ConductorOS platform.

Ultimately, the appeal of BigBear.ai as an investment is the potential for the company to consolidate its leadership position in these specialized areas of artificial intelligence.

On the other hand, operational and financial results were disrupted by weaker than expected dynamics. In the second quarter (for the period ended June 30), BigBear.ai’s revenue of $40 million was up just 3.4% year-over-year, impacted by the timing of some large contracts.

The second challenge is that profitability remains elusive. The company reported a second-quarter adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of $3.7 million, up from a loss of $3.2 million in the same period a year earlier. BigBear.ai also has over $134 million in net debt and has no clear path to generating free cash flow in the near future.

These headline numbers aren’t impressive, but the outlook for investors is still positive enough to remain optimistic about the stock. Fortunately, second-quarter revenues were up 20% over the first quarter, while management anticipates full-year revenue growth of approximately 11% from 2023 in an effort to improve margins going forward.

What I love most about BigBear.ai is the direct exposure to artificial intelligence at the cutting-edge corner of technology. The company’s shares are trading at just twice projected 2024 revenues, calculated as a forward price-to-sales ratio (P/S). This modest level, which reflects the risks associated with weak earnings trends, could turn into a bargain if the company starts generating stronger and more profitable growth.

The SoundHound AI case

SoundHound AI has become a leader in conversational artificial intelligence focused on speech-enabled applications that enable people to interact with smart devices. This technology is being integrated by automakers for in-vehicle voice commands and generative AI as a core part of their business.

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

Compared to BigBear.Ai, SoundHound AI’s trends are much more impressive. The company recorded a 54% increase in revenues in the second quarter (for the period ended June 30), and the management board cited the high dynamics of growth in the number of customers in its key industries.

The company expects 2024 revenue to grow by approximately 77%, with a preliminary 2025 forecast of $150 million, implying an even higher growth rate of 88% next year.

At the same time, investors must pay a high premium for the stock while SoundHound AI remains unprofitable. The company reported negative $13 million in adjusted EBITDA for the second quarter, and negative free cash flow is expected to continue for the foreseeable future. In this case, the company’s shares are trading at 20 times full-year revenue estimates as a forward P/S ratio, which narrows only slightly to 11 based on 2025 revenue estimates.

The market appears to be pricing in a bull run for the next decade, which can be justified by the opportunities, but it also creates a high level of expectations. This difficult balance increases the risks that SoundHound AI investors must consider.

Better buy: SoundHound AI

There’s a lot to like about BigBear.ai and SoundHound AI, which may be in the early stages of transformation. Given the speculative nature of these two small-cap stocks and the expectation of volatility, I believe SoundHound AI is a better stock buy right now. The high valuation is justified by the company’s stronger development prospects.

A position in SoundHound AI stock as part of a diversified portfolio may be beneficial to investors over the long term.