Over the past year, the growth of generative artificial intelligence (AI) platforms like OpenAI's ChatGPT has sparked a buying frenzy in many AI stocks.Includes big winners Nvidiasells powerful data center GPUs for processing AI tasks. microsoftowns a major stake in OpenAI.
Some lesser-known AI players have also capitalized on the bullish trend by merging with special acquisition companies (SPACs) and going public. Many of these companies initially attracted a lot of attention with their optimistic long-term forecasts, but their stock prices plummeted as they significantly missed their expectations.
Two of the struggling companies backed by SPACs are BigBear.ai (NYSE:BBAI) and Soundhound AI (NASDAQ: SOUN). BigBear.ai's stock price started at $9.84 after completing the merger on December 8, 2021, and is currently trading at less than $2. SoundHound AI's stock price began trading at $8.72 upon completion of the merger on April 28, 2022, and currently trades at approximately $5.
Let's take a look at why these two AI stocks have plummeted and whether either is still worth buying.
BigBear.ai aims to streamline business
BigBear.ai develops data mining and analysis tools used to aggregate information from various sources. These services are provided as modules that can be connected to an organization's existing software infrastructure and primarily serve large government agencies and enterprise customers.
Prior to going public, BigBear.ai expected revenue to grow at a compound annual growth rate (CAGR) of 40% from $140 million in 2020 to $388 million in 2023, with annual gross margins from 30% to $388 million in 2023. It claimed it could grow to 50%. The company maintains its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin in the high teens.
However, from 2020 to 2023, BigBear.ai's revenue grew at a meager CAGR of 3.5% to reach $155 million. The company's annual gross profit margin also fell to 26% in 2023, and its adjusted EBITDA margin turned negative in 2022 and 2023. The company primarily blamed the slowdown on a difficult macro environment and the bankruptcy of its major customer Virgin Orbit, but at the same time, the company significantly overestimated its growth potential.
That's why it wasn't all that surprising when Reggie Brothers CEO stepped down in October 2022. Since then, new CEO Mary Long has focused on cutting costs and optimizing the company's core business. Long also oversaw the all-stock acquisition of AI vision technology company Pangiam earlier this year, a deal that could increase near-term revenue and expand the ecosystem.
BigBear.ai expects its revenue to increase by 26% to 39% this year, compared to flat growth in 2023, as the macro environment warms and the integration of Pangiam's operations. The company's adjusted EBITDA also turned positive in the second half of 2023. While these developments are encouraging and the company's stock looks cheap at double this year's sales, there is no guarantee that the company will be able to grow its business organically over the next few years.
SoundHound AI's business model looks unstable
SoundHound develops audio and speech recognition tools. Its namesake app can identify songs, and the Houndify platform allows companies to develop their own audio tools that aren't tied to the likes of the tech giants. microsoft or alphabetGoogle.
Its flexible approach has won it a wide range of customers, including automakers. hyundaismart TV manufacturer Vizio, fast food chain Church's Chicken. The company also recently acquired restaurant solutions provider SYNQ3.
However, like BigBear.ai, SoundHound failed to meet its pre-merger goals, disappointing investors. The company initially claimed that annual revenue could grow from $13 million in 2020 to $110 million in 2023, at a CAGR of 104%. The company expected its adjusted EBITDA margin to remain negative through 2023, but planned to expand its annual gross profit margin from 55%. 77% in 2020 and 77% in 2023.
However, 2023 revenue remained at $46 million as gross profit margin rose to 75%. This corresponds to a CAGR of 52% from 2020. The company has largely attributed its slowdown to a difficult macro environment, but it also faces stiff competition from Microsoft, Google and other tech giants that can afford to offer similar services at lower profit margins. are doing. SoundHound laid off nearly half of its employees last year, but it doesn't expect adjusted EBITDA to turn positive until 2025.
In other words, SoundHound has yet to prove its business model is sustainable, even though it expects its revenue to increase by about 52% this year. The company received renewed attention in February when Nvidia bought a portion of its shares, but the company's stock price still looks expensive at 21 times this year's sales.
Better buy: SoundHound AI
I'm in no rush to buy any of these speculative AI stocks right now. But if I had to choose one, I would stick with SoundHound for four simple reasons. That means it grows faster, its growth is mostly organic, it has a wider moat, and it operates with much higher gross profit margins. BigBear.ai's stock price is cheap, but I don't have much confidence in its long-term growth potential.
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Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
AI stock improvements: BigBear.ai and SoundHound AI were originally published by The Motley Fool