SoundHound AI (NASDAQ: SOUN) and Super Micro Computer (NASDAQ: SMCI) offer distinct avenues for investment in the burgeoning artificial intelligence (AI) sector. While SoundHound’s flagship app specializes in song identification and discovery, its Houndify developer platform empowers businesses to develop custom speech-recognition solutions. On the other hand, Super Micro Computer, also known as Supermicro, is a prominent provider of AI servers.
Both companies share strong connections with Nvidia (NASDAQ: NVDA). Nvidia played a pivotal role as one of SoundHound’s early investors before its public listing in 2022, and it recently reaffirmed its support through another investment. Meanwhile, Supermicro’s collaboration with Nvidia allows it to access the chipmaker’s cutting-edge data center graphics processing units (GPUs) ahead of many competitors.
As the AI market continues to expand, both SoundHound and Super Micro Computer witnessed significant surges in their stock prices, closely mirroring Nvidia’s trajectory. Over the last 12 months, SoundHound’s stock soared by 248%, while Super Micro Computer’s stock experienced an impressive rally of 1,150%. However, the question remains: Is it prudent to invest in either of these rapidly ascending AI stocks at this moment?
SoundHound is a speculative stock
SoundHound operates in direct competition with tech giants like Microsoft and Alphabet’s Google in the audio and speech-recognition sector. However, its Houndify platform presents an attractive alternative for companies seeking to avoid reliance on these industry giants.
Notably, automakers such as Hyundai and Stellantis, smart TV manufacturers like Vizio, and fast-food chains like Church’s Chicken have adopted Houndify to develop tailored voice-recognition services. As generative AI technologies advance, this market is poised for further expansion, a trend bolstered by SoundHound’s recent acquisition of SYNQ3, a restaurant-solutions provider, aimed at broadening its ecosystem.
Having gone public via a special purpose acquisition company (SPAC) merger in 2022, SoundHound witnessed a remarkable 47% revenue increase in both 2022 and 2023. Analysts project a further revenue surge of 51% to $69.5 million in 2024.
Despite these optimistic projections, SoundHound’s current stock valuation appears steep, trading at 32 times this year’s sales. Additionally, the company remains unprofitable by generally accepted accounting principles (GAAP), with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) not expected to turn positive until 2025. Moreover, its elevated debt-to-equity ratio of 4.3 may constrain its ability to raise additional capital.
These factors may cap SoundHound’s potential upside, particularly amid persistently high interest rates. Nonetheless, the company stands to secure a solid position in the evolving voice-recognition market and could attract acquisition interest from larger competitors.
Supermicro is a foundational player in the AI market
While not the largest producer of pre-built servers, Supermicro distinguishes itself from competitors by specializing in high-performance servers tailored for demanding tasks. This strategic focus has positioned it as a key partner for Nvidia, collaborating on the design of AI servers utilizing top-tier data center GPUs. Additionally, Supermicro has partnered with Nvidia’s rival, AMD, to develop AI servers for the rapidly expanding AI market.
Despite initially flying under the radar upon its 2007 IPO due to the commoditized server market, Supermicro has emerged as one of the market’s standout growth stocks in recent years. This surge is attributed to the explosive growth of the generative AI market and increased demand for AI servers from data center operators.
In fiscal 2022 and 2023, Supermicro witnessed remarkable revenue growth of 46% and 37%, respectively. Analysts forecast a staggering 104% revenue increase in fiscal 2024, driven by relentless demand for new AI servers outpacing supply. Looking ahead to fiscal 2025, analysts anticipate a further revenue surge of 36% to $19.8 billion.
With a modest debt-to-equity ratio of 0.8, Supermicro boasts profitability, and analysts project an 86% increase in earnings per share (EPS) in 2024 followed by a 35% rise in 2025. Despite these positive indicators, the stock appears reasonably valued relative to future earnings and sales expectations, trading at 37 times forward earnings and 3 times next year’s sales. However, sustained expansion of the AI market and Supermicro’s ability to capture a growing share of the AI server market are crucial for the company to meet these projections and justify its increasing valuations.
The better buy: Super Micro Computer
While both AI companies are experiencing rapid growth, Supermicro emerges as the superior investment option compared to SoundHound AI. With a more established business, Supermicro boasts a wider moat and greater profitability. Moreover, its stock appears to offer better value. Despite SoundHound AI attracting attention following Nvidia’s investment, it has yet to demonstrate the sustainability of its business model.
