Photo credit: www.fool.com
SoundHound AI (NASDAQ: SOUN) has experienced significant fluctuations in its stock performance over the past year. Initially, shares surged following the news of Nvidia acquiring a small stake in the firm. However, the stock has faced volatility throughout 2024 and ended the year on a high note.
Nevertheless, the start of 2025 has brought challenges for SoundHound investors. The company’s stock has plummeted by 51% as of now, primarily due to Nvidia’s divestment from its SoundHound investment and the stock’s lofty valuation.
While SoundHound may have the potential for long-term growth due to the vast opportunities within the voice AI market, its current trading rate of 41 times sales could continue to hinder its performance in the immediate future. There is a possibility that the stock may decline further over the next year, potentially driving its market capitalization below $4 billion.
In contrast, another company presents a more appealing investment opportunity. This competitor has been achieving notable growth, and analysts suggest it may soon surpass SoundHound’s market cap. Let’s explore this company further.
Strong demand for cloud-based AI solutions propels DigitalOcean
DigitalOcean‘s (DOCN -0.57%) current market capitalization of $3.7 billion positions it close to SoundHound. The rising demand for its on-demand cloud computing services—primarily utilized by developers, start-ups, and small businesses—combined with its reasonable valuation, suggests it could outperform SoundHound in the upcoming year.
DigitalOcean is currently valued at just 5 times sales and 22 times projected earnings, making it an attractive buy. The company’s recent AI-centric cloud solutions are gaining traction, as reflected in its latest financial results.
The fourth quarter of 2024 saw DigitalOcean’s revenue grow 13% year-over-year to reach $205 million, while earnings per share increased to $0.49, an 11% rise. The slight dip in earnings growth from the previous quarter relates to the investment in graphics processing units (GPUs) to satisfy the high demand for cloud-based AI applications.
With its GPU Droplets service, DigitalOcean enables clients to access powerful GPUs, including Nvidia’s H100, allowing them to operate large language models and develop generative AI applications. After launching this service in October 2024, demand quickly surged, leading to capacity constraints.
This strong requirement for DigitalOcean’s AI solutions contributed to a 14% year-over-year increase in its average revenue per user (ARPU) for Q4, a marked improvement over the 6% growth recorded in the same quarter of the prior year. Continuous enhancements to its platform, including new AI-focused offerings, are likely to further drive this metric upward.
In January, DigitalOcean introduced the DigitalOcean GenAI Platform, a tool designed to assist customers in quickly building, deploying, and scaling AI agents using popular language models from Anthropic and Mistral AI. Currently in public beta, the platform has already facilitated the creation of over 1,000 AI agents, 90% of which were developed by existing clients.
The launch of this AI-focused platform represents another chance for DigitalOcean to expand its revenue through cross-selling, while also appealing to new customers. The market for AI agents is projected to grow at an annual rate of 46% through the decade’s end, according to Grand View Research.
Potential for DigitalOcean to surpass SoundHound’s market cap
Investors should be aware of DigitalOcean’s guidance for 2025, anticipating revenue of $880 million at the midpoint of its forecast, reflecting a 13% increase from the previous year. However, this projection may prove conservative due to the accelerating demand for its cloud-based AI services, which could result in a higher valuation multiple.
If DigitalOcean achieves a sales multiple of 7.5 after a year—aligning with the average in the U.S. technology sector—and meets its revenue forecast, its market capitalization could soar to $6.6 billion. This figure would surpass SoundHound AI’s capitalization, especially if SoundHound struggles with its elevated valuation.
Source
www.fool.com