Which AI Investment, SoundHound or BigBear.ai, is Likely to Excel More in 2025?
While examining artificial intelligence (AI) businesses with market caps under $10 billion, two notable entities garner attention: SoundHound AI (SOUN 1.96%) and BigBear.ai (BBAI 9.61%). Initially, both entities commenced the year with market values less than $1 billion, but SoundHound's stock price surge of around eightfold in 2024 (as of current date) elevated its market cap approximately to $7 billion.
The debate arising is whether investors should remain loyal to SoundHound or if BigBear.ai might emulate its success in 2025. By scrutinizing essential aspects of each stock, we can determine which might excel in 2025.
Voice vs. Vision
In the realm of smaller stocks, the opportunity in front of them is a crucial factor in their performance.
SoundHound AI is striving to emerge as the frontrunner in AI voice technology. Its technology allows for more tailored, colloquial communication by employing speech-to-deep-meaning-understanding technology to comprehend a user's intent even before they complete speaking. It has a solid foothold in the automobile and restaurant industries.
Recently, SoundHound acquired Amelia, a company specializing in an AI conversational platform for tasks such as customer service, employee onboarding, and back-office work. This acquisition broadened SoundHound's reach to diverse sectors, including retail, healthcare, insurance, and financial institutions.
SoundHound still boasts significant expansion opportunities in its main auto and restaurant industry segments, and its stock received a boost this month following the announcement that Torchy's Tacos was implementing its AI phone ordering system in all 130 of its locations.
However, the most promising opportunity lies in SoundHound transforming into a comprehensive AI commerce voice platform capable of answering complex questions across numerous industries with their distinct jargon and interaction styles. According to market analysts Frost & Sullivan, SoundHound's Amelia Conversational AI Platform leads the healthcare sector, an estimated $2.34 billion opportunity by 2027's end. Additionally, numerous other markets beckon SoundHound.
SoundHound exhibited prominent revenue growth, including a 89% surge in last quarter.
In contrast, BigBear.ai is centered around the United States government defense industry. The company was formed through the merger of analytic company BigBear and systems integrator NuWave by private equity firm AI Industrial Partners. Two additional analytical firms later joined its roster, and it debuted on the market through a special purpose acquisition company (SPAC) in 2021.
A considerable portion of BigBear.ai's revenue stems from the federal government, although it also boasts customers in the manufacturing, life sciences, and logistics industries. It provides supply chain and logistics solutions, as well as cybersecurity, digital identity, automation, and data collection offerings.
BigBear.ai has experienced operational inconsistency. Revenue dipped by 21% in Q1, primarily due to Virgin Orbit's bankruptcy and the termination of an Air Force contract. However, it regained revenue momentum in Q3, increasing by 22%, thanks to the acquisition of Pangiam.
Pangiam's systems are commonly utilized in locations such as airports, and the deal is expected to provide BigBear.ai advancements in faciorecognition, anomaly detection utilizing image-based analysis, and high-level biometrics. With this acquisition, the company aims to thrive as the industry's most extensive vision AI portfolio.
Margins
In addition to recent revenue growth, one significant disparity between SoundHound and BigBear.ai is their gross margins. Software and AI firms tend to have substantial gross margins due to low costs associated with product development and distribution.
SoundHound exhibits diverse revenue streams, primarily through royalty agreements or subscriptions. When a product is involved, such as car sales incorporating its solution, it receives a royalty. Meanwhile, solutions like AI restaurant ordering systems are provided through subscriptions. Both ventures traditionally yield high-margin revenue streams upon scaling.
During the last quarter, SoundHound's gross margin was 49%, while its adjusted gross margin reached 60%. However, its gross margin surpassed 75% in the full year 2023, with a target of maintaining gross margins over 70% moving forward.
BigBear.ai, in contrast, reported a gross margin of only 25.9% during the previous quarter. Its gross margin stood at 25.2% throughout the first nine months of the year.
BigBear.ai's slim gross margins are a peculiarity of its background as a government contractor, as its engineers and data scientists in the government sector often require colocation and on-site presence. This adds considerable expenses compared to just running a pure software solution.
Nonetheless, the company aims to augment its gross margins as it boosts its software revenue share compared to services and expands into the commercial sector.
Conclusion
With steadier revenue growth and more substantial margins, SoundHound AI appears to possess a more promising future compared to BigBear.ai. In terms of valuation, however, BigBear.ai's stock holds a significant edge over SoundHound AI, trading at a meager forward P/S ratio above 3, while SoundHound is currently valued at 38 times 2025 analyst estimates after a substantial end-of-year rally.
I prefer SoundHound's business approach, but the significant jump in its stock value has me considering a step back for now. Both companies involve a degree of speculation, but with Virgin Orbit exiting bankruptcy and BigBear.ai demonstrating financial prudence by reducing expenses, I believe the latter is the superior choice for 2025. SoundHound, in my opinion, has momentarily outpaced itself.
In the realm of investment decisions, some investors might be interested in diversifying their portfolio by investing in the finance sector. Given SoundHound's impressive revenue growth and significant margin expansion, it could be an attractive option for investors looking to invest in an AI voice technology company with high-margin revenue streams.
Alternatively, investors seeking to invest in a company with a strong foothold in the defense industry might consider BigBear.ai, especially considering its recent momentum in acquiring new technologies and expanding into the commercial sector. As a result, BigBear.ai's gross margins are expected to improve over time, potentially making it an appealing investment opportunity.
