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SoundHound AI(NASDAQ: SOUN) might not be a household name, but it has been one of the best-performing stocks since artificial intelligence (AI) became the hot phrase in the market around the end of 2022.
SoundHound, which specializes in voice-activated technology and works with restaurants and automakers, has seen its stock price jump 429% since the start of 2023, even after a recent pullback. At a market cap of $4 billion, the company is essentially still a small-cap stock with plenty of room for future growth. Investors considering buying shares of SoundHound might also be interested in Cerence (NASDAQ: CRNC), a competitor that is even smaller with a market cap of around $400 million.
So, which of these two voice AI stocks is the better buy today? Let's take a look at how the two companies stack up against each other.
Image source: Getty Images.
Business model: SoundHound AI vs. Cerence AI
After 10 years of innovation and research, SoundHound launched its Houndify platform in 2016. The Houndify platform gives brands the ability to build conversational voice assistants with tools like automatic speech recognition and natural language understanding. It has a smart ordering system for restaurants that takes voice orders and automatically processes them.
The company primarily collects revenue in three ways. First, through royalties, SoundHound collects revenue based on usage or volume for products created with its voice technology. It also offers a subscription program for customer service or food ordering, and finally, it has a monetization layer in which it collects a revenue share for add-on services in its voice-enabled products.
Cerence's focus is on AI-powered virtual assistants for the mobility and transportation market. The company primarily targets the auto market, allowing drivers to engage with dashboard systems by just using their voice.
It counts nearly every major automobile OEM as its customer, including BMW, Daimler, Ford Motor Company, General Motors, among others. Its technology has been installed in more than 500 million automobiles to date, and 52% of all cars shipped in the fiscal year ended Sept. 30, 2024.
The biggest difference between the two companies is that SoundHound targets a wide range of industries while Cerence is focused on the auto market.
Financials: SoundHound AI vs. Cerence AI
SoundHound reported strong growth in 2024, with revenue up 85% to $84.5 million. However, the company has made several acquisitions over the last year, and it's unclear how much of that revenue growth was organic, excluding the impact of acquisitions.
Soundhound is still a long way from profitability with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $61.9 million. For 2025, the company expects its revenue to double, calling for $157 million to $177 million in revenue this year.
Cerence, on the other hand, isn't growing as fast as SoundHound, but it is larger. In fiscal 2024, which ended on Sept. 30, revenue rose 12.5% to $331.5 million, but its revenue has fallen over the last two quarters, and it expects revenue to decline to $236 million-$247 million due to the loss of a contract with Toyota.
However, Cerence is profitable, with an adjusted net income of $56.1 million in fiscal 2024.
Valuation: SoundHound vs. Cerence
SoundHound and Cerence have much different valuation profiles.
SoundHound, which is growing rapidly, is trading at a price-to-sales ratio of 37, which seems fair for a company set to double its revenue this year.
Cerence, on the other hand, trades at a trailing price-to-earnings ratio of less than 8, but analysts expect earnings to fall sharply, so its forward P/E is about 60.
Which is the better buy?
Cerence stock soared earlier this year when the company announced a new partnership with Nvidia. That news came out shortly before Nvidia revealed that it had dumped its stake in SoundHound, which it bought a few quarters earlier.
SoundHound is clearly growing rapidly, but the company seems unlikely to be profitable for years, and competition from large tech companies like Amazon, Alphabet, and Apple could spoil the company's growth.
Cerence is more established than SoundHound. It's profitable, and the declining growth seems to be just temporary, especially now that it enjoys the support of Nvidia.
Risk-seeking growth stock investors may prefer SoundHound, but I think Cerence is the better buy here as it's much less risky and clearly demonstrates its ability to turn a profit. Additionally, future partnerships like the one with Nvidia could drive another surge in the stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Nvidia. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft, Cerence, and General Motors. The Motley Fool has a disclosure policy.
