2 Up-and-Coming Artificial Intelligence (AI) Stocks I'm Keeping My Eye On

These relatively unknown companies have massive potential.

When you think of artificial intelligence (AI) stocks, companies like Nvidia, CrowdStrike, and Alphabet probably come to mind right away. They do for me, and I've written extensively about them, including articles here and here. But many smaller companies are making giant strides.

Just a few years ago, speech recognition was only a pipe dream. Now, I can make a phone call from my car using just my voice. But using AI, new conversational technology is going to blow us away. SoundHound AI (SOUN 7.48%) is a major innovator.

Now imagine being able to automate repetitive tasks at work, freeing us up to focus exclusively on high-level tasks that really make a difference. UiPath (PATH 26.72%) is a leader in robotic process automation that does just that.

Interested? Here is some valuable info about each opportunity.

SoundHound AI

SoundHound specializes in conversational intelligence. Like my simple example above, its technology takes current limited voice commands to a new level. Its SoundHound Chat AI for Automotive tech allows users to conversationally ask about routes, weather, landmarks, vehicle problems, and anything else in a generative AI database. This virtual assistant application seems like a logical next step for vehicles. But other industries are even more intriguing.

Fast food and other quick-order businesses, like coffee or ice cream shops, are terrific markets for SoundHound. SoundHound's Dynamic Interaction allows people to place direct orders quickly and conversationally. The customer says, "I'd like a hamburger with cheese and no onion, plus a medium fry and a Diet Coke," and it pops up on the screen. The customer can then say, "On second thought, make that a large fry," and the change comes right up. SoundHound's demo is incredibly impressive, and it's obvious how game-changing this can be for drive-thru and in-store shops' costs and efficiency.

These are just a few of the ways conversational intelligence can improve companies' bottom lines.

SoundHound AI makes revenue in three ways:

1. Royalties
2. Subscriptions
3. Monetization

When a company uses SoundHound's platform to create a product, like the vehicle assistant discussed above, SoundHound receives a royalty for each product sold. The company earns subscription revenue when a company uses its tech for things like the restaurant voice ordering system. Finally, monetization revenue comes from commissions and revenue sharing.

For instance, if a company uses a platform created with SoundHound in the vehicle, and the user asks for a restaurant recommendation, the restaurant would pay a commission when the user dines there.

SoundHound has booked $38 million in revenue over the trailing 12 months and reported 19% year-over-year growth last quarter. The company has a $528 million market cap, putting the price-to-sales (P/S) ratio at 12.

SOUN Revenue (TTM) data by YCharts

This isn't outlandish for a growing software company; however, investors should be aware that SoundHound has millions of preferred stock shares that are eligible to convert to common shares. This will significantly dilute common stockholders. The diluted weighted-average share count rose from 197 million as of Q3 2022 to 242 million as of Q3 2023. For this reason, I am watching SoundHound stock closely, but investors should exercise caution at this stage.

UiPath

Imagine that you are a mortgage processor. As anyone who has purchased a home knows, numerous documents will be sent in by the potential buyer, from W-2s to tax returns to driver's licenses and letters from employers. The processor spends a significant part of their day downloading attachments and putting the info into the correct spot on the application. This is not a value-adding process for the business -- it's just data entry.

UiPath's AI technology can automate this process, downloading attachments, filling in the information on the proper form, pointing out missing info, and even composing reply emails that alert the applicant of missing info. Now the human spends their time reviewing, approving, and performing high-level tasks that add real value. This is one case study that UiPath shares. You can probably think of a task at work that you would love to see automated; I know I can.

UiPath is on a terrific growth trajectory, with $1.4 billion in annual recurring revenue reported in Q3 of fiscal year 2024, as shown below.

The company makes most of its money through licensing and subscription services. UiPath isn't profitable yet, which isn't unusual for a high-growth tech company. It does have a gross margin of 85%, which is encouraging for future profit potential. UiPath also has $1.8 billion on hand to fund its growth with no long-term debt.

The stock trades for about 11 times sales right now, which is slightly lower than AI company C3.ai, and much lower than Palantir, another popular AI play, as depicted below.

This adds up to an interesting stock for long-term growth investors who don't mind a little risk and volatility. AI is fertile ground for investors, and these two companies will be fascinating to follow.