SoundHound AI Stock vs. Palo Alto Networks Stock: Wall Street Says Only One Will Head Higher in 2025

Artificial intelligence (AI) was the driving force behind some of the biggest winners in the stock market in 2024. Companies able to leverage the power of AI within their business or assist other enterprises in using AI saw their stock prices soar. This trend appears poised to persist in 2025. Two companies that could experience strong growth driven by advancements in AI capabilities are SoundHound AI (NASDAQ: SOUN) and Palo Alto Networks (NASDAQ: PANW).

While SoundHound expanded its customer base for its audio recognition platform in 2024 through a key acquisition, Palo Alto leverages machine learning to assist enterprises in identifying and preventing cyberattacks. SoundHound’s shares witnessed a staggering 836% increase in 2024, whereas Palo Alto returned a more measured 23%. However, Wall Street forecasts divergent futures for these stocks, with only one expected to continue its upward trajectory while the other may be in for a downturn.

SoundHound: A Fast-Growing Business with an Expensive Stock

Founded about 20 years ago, SoundHound initially developed an app capable of identifying songs from melodies hummed by users. It has evolved into a leader in “conversational intelligence,” which combines audio recognition and natural language processing, allowing users to engage in near-conversational interactions with computers.

In 2024, SoundHound made headlines with its acquisition of Amelia, a leader in enterprise conversational AI. This move significantly broadened its customer base. By the third quarter, SoundHound’s largest customer represented only 12% of revenue, down from a staggering 72% the previous year, demonstrating a successful diversification strategy. The company’s reach now extends across various industries, including restaurants, financial services, healthcare, insurance, and automotive manufacturers, which previously accounted for 90% of its business.

Following the Amelia acquisition, SoundHound’s revenue accelerated with a remarkable 89% increase in the third quarter alone. The company boasts a backlog of subscriptions exceeding $1 billion, which is set to provide steady revenue over the next six years. Management anticipates revenue of approximately $165 million for 2025, nearly double their projections for 2024, which indicates a continued strong growth trajectory.

However, this rapid growth comes at a cost. The acquisition has significantly impacted the cost of sales, and while management expects to realize synergies, a return to the previous 75% gross margin levels appears unlikely. The company aims to achieve profitability on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by year-end, though profitability in line with generally accepted accounting principles (GAAP) may take several more years. Despite its growth, SoundHound’s stock is currently valued at a price-to-sales ratio of about 29 times its 2025 revenue outlook, which is considered quite high.

Palo Alto Networks: A Cybersecurity Leader with a Big AI Advantage

Contrarily, Palo Alto Networks has established itself as a leading provider of enterprise cybersecurity solutions. The company offers a range of hardware and software services designed to protect client networks from unauthorized access. Their services also extend to cloud and endpoint security, enabling enterprises to securely interact with public cloud platforms amidst an increasing threat landscape.

The rise of remote work and the shift of operations to hybrid models have made cybersecurity a vital concern for businesses. Palo Alto Networks is well-positioned to address these challenges through its innovative use of machine learning for threat detection and vulnerability management. With access to vast amounts of data, Palo Alto can build effective algorithms, allowing the company to outpace competitors in the market.

In the first quarter of fiscal 2025, Palo Alto reported a 20% year-over-year growth in its remaining performance obligations, indicating a solid pipeline of business. Notably, annual recurring revenue from software-based next-gen security offerings surged by 40%, exceeding $4.5 billion. Management is optimistic that this figure could soar to $15 billion by 2030. As Palo Alto transitions towards more software services, it is expected to achieve improved gross margins over time.

Palo Alto Networks trades at a price-to-sales ratio of approximately 12.2 times analysts’ 2025 consensus estimates, making it a more attractive option than SoundHound. Coupled with its strong profit potential driven by software sales leverage and scalable operational model, Palo Alto Networks presents a compelling investment opportunity in the current market landscape.

Conclusion

While Wall Street indicates a promising future for Palo Alto Networks as a continued leader in the cybersecurity landscape, SoundHound’s ambitious growth strategy faces significant valuation concerns. Investors should carefully weigh these factors as they consider opportunities within these two companies ahead of 2025.