Artificial intelligence (AI) is already permeating many industries, transforming customer service, data analysis, financial services, and much more. Two AI companies that have caught the attention of many investors lately are conversational AI company SoundHound AI (SOUN +1.90%) and semiconductor company Broadcom (AVGO +0.17%).
SoundHound's share price has soared 85% over the past year, and Broadcom's has popped 64%. But which company looks like the better AI stock over the long term? Here's what you need to know.
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Broadcom's processors are giving AI a boost
Broadcom's application-specific integrated circuits (ASICs) are used in AI data center infrastructure, giving large tech companies -- including Alphabet and Meta -- the ability to have custom AI processors. Tech giants are in an AI race, with most of them trying to create the most advanced tools. This competition has them pursuing the latest processors, including Broadcom's, hoping to get an edge in the market.
The global AI chip market will be worth an estimated $334 billion by 2030, and Broadcom is already benefiting from demand for artificial intelligence processors. The company's AI revenue, which accounts for about 28% of total sales, spiked 77% in the first quarter (which ended Feb. 2) to $4.1 billion.
And there's more AI semiconductor sales growth on the way. Broadcom's management estimates second-quarter AI revenue to be $4.4 billion -- which would be a 44% increase from the year-ago quarter -- as the company's clients "continue to invest in AI."
NASDAQ: AVGO
Key Data Points
If there's one thing potential Broadcom investors should be aware of, it's that the company's shares are expensive right now. Broadcom's stock has a trailing price-to-earnings ratio of 107, which is high even for a fast-growing tech company. For reference, the S&P 500's (^GSPC +1.18%) P/E ratio is 28, and fellow AI semiconductor company Nvidia has a P/E multiple of just 45.
SoundHound is driving a conversational AI transformation
SoundHound's AI platform allows companies to integrate advanced conversational tools into their products and services, making them smarter than ever. For example, Stellantis uses SoundHound's technology in many of its vehicle brands for in-vehicle voice commands. Its tech is also used in drive-thru ordering and customer service calls, and allows companies to build their own custom AI agents.
Demand for such services is increasing rapidly, and SoundHound's sales grew 151% to $29 million in the most recent quarter, showing just how well it's tapping into this market. The company also has no debt and finished the quarter with $246 million in cash and cash equivalents.
NASDAQ: SOUN
Key Data Points
There's likely plenty of room for SoundHound to grow, too, as the conversational AI market is estimated to be worth $152 billion in about eight years. But it's worth mentioning that SoundHound isn't yet profitable, and the company had a non-GAAP (generally accepted accounting principles) loss per share of $0.06 in the quarter, only slightly better than its loss of $0.07 in the year-ago quarter.
While SoundHound AI is growing fast and expanding its sales, its stock is very expensive right now, with a price-to-sales multiple of 34, compared to an average P/S ratio of 11 for the software application sector.
Here's why Broadcom is the better AI stock
There's plenty to like about both companies, and I don't fault investors for being interested in either one. But if you're looking for the best AI stock to put some money toward right now, I think Broadcom wins out because it's profitable.
SoundHound appears to be making the right moves to grow its company, but the tech industry can often be too focused on growth and not enough on profitability. Broadcom is achieving both right now and tapping into a vast AI semiconductor market.
Investors who take a buy-and-hold approach with either company are likely making a good choice, but Broadcom wins out in this comparison for its massive opportunity in the AI semiconductor space and its profitability.
