SoundHound AI vs. Cerence AI: Which Voice AI Stock is the Better Buy?

In the rapidly evolving world of artificial intelligence, two companies stand out as leaders in voice-activated technology: SoundHound AI and Cerence AI. Both have seen significant growth and investment, but which one is the better buy for investors looking to capitalize on the AI boom? Let's dive into the details and find out.



Business Models: Diverse vs. Focused

SoundHound AI's business model is centered around its Houndify platform, which allows brands to build conversational voice assistants. The company collects revenue through royalties, subscription programs, and revenue shares for add-on services. SoundHound targets a wide range of industries, including restaurants and automakers, providing it with a diverse revenue base. For instance, the company has a smart ordering system for restaurants that takes voice orders and automatically processes them.

Cerence AI, on the other hand, focuses 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 using their voice. Cerence has installed its technology in over 500 million automobiles to date, and 52% of all cars shipped in the fiscal year ended Sept. 30, 2024, included its technology. This focus on the automotive industry provides Cerence with a stable and growing market, as the demand for voice-activated systems in cars continues to increase.

Financial Performance: Growth vs. Profitability

SoundHound AI reported strong growth in 2024, with revenue up 85% to $84.5 million. The company expects its revenue to double in 2025, calling for $157 million to $177 million in revenue this year. However, SoundHound is still a long way from profitability with an adjusted EBITDA loss of $61.9 million in 2024.

Cerence AI, on the other hand, isn't growing as fast as SoundHound, but it is larger and profitable. In fiscal 2024, which ended on Sept. 30, revenue rose 12.5% to $331.5 million, but 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.

Market Valuation: High Growth vs. Established Profitability

SoundHound AI is trading at a price-to-sales ratio of 37, which seems fair for a company set to double its revenue this year. Cerence AI 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.

Growth Potential: Rapid Expansion vs. Stable Market

SoundHound AI is 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 AI 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.

Conclusion: The Better Buy

In conclusion, while both companies have strong business models, Cerence AI's focus on the automotive industry and its profitability make it a more sustainable long-term investment. Cerence's partnership with Nvidia and its focus on the auto market, which has a large installed base, also suggest potential for future growth. SoundHound AI, while growing rapidly, faces competition from large tech companies and is still a long way from profitability.

Investors considering buying shares of SoundHound AI might also be interested in Cerence AI, a competitor that is even smaller with a market cap of around $400 million. Cerence AI's focus on the automotive industry and its profitability make it a more sustainable long-term investment. SoundHound AI, while growing rapidly, faces competition from large tech companies and is still a long way from profitability.