SoundHound AI(NASDAQ: SOUN) and Snowflake(NYSE: SNOW) represent different ways to invest in the growing artificial intelligence (AI) market. SoundHound develops AI-driven speech and audio recognition tools that can be customized for a wide range of industries. Snowflake's cloud-based data warehouses are used to collect and clean up data from fragmented computing platforms so they can be easily read by third-party analytics and AI apps.
The bulls initially embraced both stocks. SoundHound AI's stock started trading at $8.72 after it went public by merging with a special purpose acquisition company (SPAC) on April 28, 2022, and it soared to a record high of $14.98 about a week later. Snowflake went public at $120 per share via a traditional IPO on Sept. 16, 2020. Its stock more than doubled to $245 on the first trade and rallied to a record high of $401.89 in November 2021.
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Yet both of these hot AI plays lost their luster as their revenue growth cooled off and rising rates compressed their valuations. Today, SoundHound and Snowflake both trade about 70% below their record highs and at steep discounts to their initial prices. Should investors buy either of these fallen growth stocks as a turnaround play?
SoundHound AI still has a lot to prove
SoundHound's namesake app identifies songs by hearing a short clip or a few hummed bars, but it generates most of its revenue from Houndify -- a developer platform which allows companies to create customized speech recognition tools. Its customers include automakers like Hyundai, smart TV makers like Vizio, fast food chains like Church's Chicken, and other companies which don't want to feed their data to tech giants like Alphabet's Google.
SoundHound's defensible niche and importance to the AI market attracted the attention of Nvidia, which boosted its stake in the company earlier this year and integrated its voice recognition tools into its Drive automotive platform. It also has plenty of other irons in the fire: it's been expanding its presence in the restaurant sector by acquiring SYNQ3 and Allset, scaling up its enterprise AI ecosystem with its recent takeover of Amelia, and working with the AI chatbot maker Perplexity to upgrade its own large language models (LLMs).
SoundHound's revenue rose 47% in both 2022 and 2023. It expects its revenue to grow at least 74% in 2024 as it integrates its latest acquisitions, then rise more than 88% from that baseline to about $150 million in 2025.
That outlook is impressive, but it remains deeply unprofitable even after it laid off nearly half of its workforce last year. Analysts expect its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to gradually improve from negative 78% in 2023 to negative 16% in 2025, but that doesn't mean its business model is sustainable yet. It also notably increased its share count by 83% over the past two years with its secondary offerings and high stock-based compensation expenses, and that dilution is a bright red flag for a stock that already trades at 20 times this year's sales.
Snowflake's hypergrowth days are ending
Snowflake's cloud-based data warehouse offers its clients a flexible consumption-based pricing model and is compatible with a wide range of cloud infrastructure platforms. That makes it an attractive option for companies that run their services on multiple cloud platforms and don't want to lock themselves into a single cloud provider.
The company initially impressed with its breakneck growth. Its product revenue, which accounts for most of its top line, soared 120% in fiscal 2021 (which ended in January 2021), 106% in fiscal 2022, and 70% in fiscal 2023. Its net revenue retention rate, which gauges its year-over-year growth per customer over a trailing-12-month period, jumped from 168% in fiscal 2021 to 178% in fiscal 2022 but dipped to 158% in fiscal 2023.
However, in fiscal 2024, its product revenue only rose 38% as its net revenue retention rate fell to 131%. It only expects its product revenue to grow 24% in fiscal 2025 with declining retention rates. It mainly blamed that slowdown on the macro headwinds, but the abrupt retirement of its CEO Dan Slootman this February and Berkshire Hathaway's liquidation of its stake of Snowflake stock convinced many investors its high-growth days were over.
Analysts expect Snowflake's total revenue to only rise 26% to $3.53 billion this year as its adjusted EBITDA declines 20% to $280 million. It's also expected to stay unprofitable for the foreseeable future. That's not an impressive outlook for a stock that still trades at 11 times this year's sales, but its share count has only risen 4% over the past four years and it's using buybacks to offset its dilution. The bulls believe the rapid growth of the AI market will drive companies to store more data in Snowflake's warehouses, but the bears think it could struggle to break even in a market filled with similar services.
The better buy: SoundHound AI
I wouldn't rush to buy either of these AI-driven stocks right now. SoundHound still needs to prove its hypergrowth rates are sustainable, and Snowflake needs to fire up its core growth engines again. But if I had to pick one over the other, I'd pick SoundHound over Snowflake because its growth is accelerating, its moat is wider, and it's backed by the AI bellwether Nvidia.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Nvidia, and Snowflake. The Motley Fool has a disclosure policy.
