There's no hotter area for investors right now than artificial intelligence (AI). Any list of the top-performing stocks will be chock-full of AI companies. However, even high-flying AI stocks can feel the effects of gravity.
Snowflake(NYSE: SNOW), for example, was up nearly 50% over the last 12 months but recently gave up close to half of its gain. Soundhound AI(NASDAQ: SOUN) had skyrocketed more than 220% so far in 2024. Its shares have fallen close to 25% below the peak, though.
Sometimes pullbacks present great buying opportunities. Which AI stock is the better buy on the dip -- Snowflake or Soundhound AI?
The case for Snowflake
Snowflake has achieved tremendous success with its Data Cloud, a cloud-based data warehouse platform. Over 9,400 companies use Snowflake's technology, including nearly 700 of the Forbes Global 2000.
Existing customers tend to stick with Snowflake and use more of its services, as evidenced by the company's net revenue retention of 131%. This customer loyalty has been a big factor behind Snowflake's impressive growth in recent years. Two opportunities especially stand out for Snowflake going forward.
First, the company hopes to land more large customers. It has made solid progress on this goal with 461 customers at the end of fiscal year 2024 that each generated $1 million or more in annual revenue. That number is up from 331 at the end of fiscal 2023.
Second, Snowflake has significant international growth potential. In the fourth quarter of fiscal 2024, 80% of the company's revenue was generated in the Americas compared to only 15% in the Europe, Middle East, and Africa region and 5% in the Asia Pacific and Japan region.
So why did Snowflake's shares fall recently? The company's guidance for the first quarter and full-year of fiscal 2025 was lower than expected. Also, Snowflake had a change at the top with Frank Slootman stepping down as CEO. He was replaced by Sridhar Ramaswamy, who previously served as vice president of AI. Slootman will remain active with Snowflake as chairman of the board.
The case for Soundhound AI
Soundhound AI ranks as a top leader in voice AI technology. Its platform is used in millions of products, notably including voice systems in cars and restaurant ordering systems.
The company's customer base features a virtual "who's who" in the automotive industry: Stellantis (the parent company for Alfa Romeo, Chrysler, Dodge, Jeep, and more), Honda, Hyundai, and Kia especially stand out. Several major players in the restaurant business are also in the group, such as Beef O'Brady's, Krispy Kreme, and White Castle.
Soundhound AI is targeting a total addressable market that could exceed $160 billion by 2026. It hopes to increase penetration in the automotive voice AI market by 15x over the next few years. The company also thinks it has a tremendous opportunity in attracting restaurants that focus on delivery, takeout, and drive-through.
With a growing customer base and clear growth drivers, what caused Soundhound AI's shares to pull back in recent days? Blame it on the company's Q4 update. Soundhound's top and bottom line results came in below what Wall Street expected.
Better buy on the dip?
Both Snowflake and Soundhound AI fell by roughly the same percentage after their recent quarterly updates. Both companies should have strong growth prospects. So which is the better buy on the dip?
While Snowflake is still unprofitable based on generally accepted accounting principles (GAAP), it posted positive adjusted earnings in the latest quarter. Meanwhile, Soundhound AI remains unprofitable across the board. The company expects to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2025.
However, Soundhound AI is delivering much stronger growth than Snowflake. Soundhound expects revenue to soar more than 50% in 2024. Snowflake projects revenue growth this fiscal year of 22%.
I think the decision between these two AI stocks comes down to valuation. Snowflake trades at a forward price-to-sales multiple of a little over 18x. Soundhound AI trades at more than 20.5 times forward sales.
Between these two stocks, I'd go with Snowflake. Both are priced for perfection, though. Investors can find even more attractive AI stocks to buy right now, in my view.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
