Is the AI Hype Cycle Still Driving Small-Cap Opportunities

Key Takeaways

• SoundHound AI (SOUN) offers a high-growth, commercial-focused play in conversational AI, demonstrating strong revenue acceleration and improving gross margins.
• BigBear.ai (BBAI) is pivoting towards platform-driven growth in the defense and national security sectors, backed by a strengthened balance sheet and strategic acquisitions.
• While both are speculative, SOUN's operational momentum and diversified commercial applications give it a clearer edge for outperformance in 2026, despite its richer valuation.

Is the AI Hype Cycle Still Driving Small-Cap Opportunities?

The artificial intelligence investment boom continues to reshape market narratives, pushing capital beyond the mega-cap giants into smaller, more specialized AI players. Investors are increasingly seeking leveraged exposure to AI adoption, even in companies with higher risk profiles but significant upside potential. This dynamic has brought names like SoundHound AI (NASDAQ: SOUN) and BigBear.ai (NYSE: BBAI) into sharper focus, as both aim to carve out niches in the burgeoning AI landscape.

However, the enthusiasm is tempered by a clear-eyed view of risks. While many investors expect continued upward momentum, concerns about AI overvaluation and potential market volatility persist, especially if innovation fails to deliver as quickly as hoped. The Motley Fool's 2026 Investor Outlook highlights that while AI will remain a primary market force, investors are keen to identify long-term beneficiaries rather than chasing short-term momentum. This necessitates a deeper dive into the fundamentals and strategic positioning of companies like SoundHound and BigBear.ai.

Both companies operate at the intersection of applied AI and real-world enterprise deployments, but they approach the opportunity from distinct angles. SoundHound focuses on commercial voice and conversational AI, while BigBear.ai is deeply embedded in government and national security. This divergence in target markets and technological applications creates a fascinating comparative study for investors looking to navigate the complex AI investment landscape. Understanding their unique strengths, weaknesses, and growth trajectories is crucial for determining which might offer superior gains in the coming year.

SoundHound AI: Riding the Wave of Conversational AI Adoption?

SoundHound AI has emerged as a prominent pure-play bet on conversational and agentic AI, targeting a broad commercial market. The company's technology powers voice and natural language interfaces across diverse sectors, including automotive systems, restaurants, IoT devices, financial services, and enterprise contact centers. This diversified customer base stands in stark contrast to BigBear.ai’s government-heavy exposure, offering SoundHound a wider array of growth avenues.

Operationally, SoundHound has demonstrated strong momentum. In the third quarter of 2025, the company reported record revenues of $42 million, marking a robust 68% year-over-year increase. Management subsequently raised its full-year revenue guidance to a range of $165 million to $180 million, signaling accelerating adoption across its verticals. This growth is underpinned by the scalability of its software-centric model, reflected in non-GAAP gross margins of 59.3% in Q3 2025, a significant improvement from previous quarters.

SoundHound's Agentic+ framework, anchored by the Amelia platform, combines generative AI, multi-agent orchestration, and deterministic workflows to deliver production-ready AI at scale. Recent press releases highlight key wins, such as the extension of its partnership with Five Guys, where its AI-powered ordering agent has handled over one million guest interactions. The company also announced new Vision AI for vehicles and expanded its enterprise AI adoption through a partnership with Bridgepointe Technologies, showcasing its ability to innovate and expand its market reach.

The company’s balance sheet also provides a solid foundation, with $269 million in cash and no debt at the end of the third quarter of 2025. This financial flexibility allows SoundHound to invest in further growth initiatives and potential acquisitions, positioning it well to capitalize on the expanding demand for voice-enabled AI solutions. Analysts currently hold a "Buy" consensus on SOUN, with a median price target of $14.00, suggesting substantial upside from its current price of $7.82.

SoundHound AI: The Path to Profitability and Valuation Risks

Despite SoundHound's impressive revenue growth and strategic wins, the path to sustained profitability remains a significant challenge and a key concern for investors. The company continues to report substantial GAAP net losses, which, while partly distorted by mark-to-market adjustments related to acquisition earnouts, still reflect an elusive profitability picture. Adjusted EBITDA was a loss of $14.5 million in the third quarter of 2025, underscoring the ongoing need for greater scale to absorb elevated operating costs.

SoundHound’s valuation also presents a point of contention. Trading at a trailing 12-month (TTM) price-to-sales (P/S) ratio of 22.14, and a forward 12-month P/S of 21.84X, the stock carries a significant premium compared to the industry average. This rich valuation reflects high expectations for future revenue growth and margin expansion. However, it also introduces considerable downside risk if the company's execution falters or if analyst estimates for future profitability turn less favorable.

The company's operating margin stands at a concerning -217.6% (TTM), with a net margin of -210.7% (TTM), highlighting the substantial expenses relative to its revenue. While SoundHound aims for adjusted EBITDA profitability by year-end 2025 and a "breakeven operating profile" heading into 2026, achieving this will depend heavily on its ability to convert scale and cost efficiencies into sustained margin improvement. The expected $20 million in annual run-rate synergies from the Interactions acquisition, primarily from migrating workloads to SoundHound’s cloud, will be critical here.

Investor sentiment has been mixed, with SoundHound stock down 10.6% over the past year, lagging the broader technology sector. This divergence suggests that while fundamentals are improving, valuation concerns and persistent losses have cooled some of the initial investor enthusiasm. The company's next earnings report on May 6, 2026, will be closely watched for signs of progress on both revenue growth and profitability metrics, particularly its gross margin expansion and efforts to control operating expenses.

BigBear.ai: A Strategic Pivot in Government AI

BigBear.ai is positioning itself as a leader in AI-powered decision intelligence solutions, primarily serving defense, national security, and critical infrastructure sectors. This highly specialized focus differentiates it from SoundHound's broad commercial approach, embedding BigBear.ai deeply within secure, mission-critical government markets. The company's AI and predictive analytics capabilities are relied upon in complex, distributed, and mission-based operating environments, offering a unique value proposition.

A significant catalyst for BigBear.ai in 2025 was its strategic narrative shift, underpinned by a dramatically strengthened balance sheet. The company ended the third quarter of 2025 with a record $456.6 million in cash, providing substantial financial flexibility for aggressive growth initiatives. This capital strength directly supports its most important strategic move: the announced acquisition of Ask Sage. Ask Sage is a fast-growing generative AI platform specifically designed for secure, classified, and regulated environments, which aligns perfectly with BigBear.ai's core market.

The Ask Sage acquisition is poised to transform BigBear.ai's business model, moving it towards a more platform-driven growth strategy. This pivot aims to reduce its reliance on traditional government contracting, which has historically led to revenue volatility due to program timing and procurement delays. By integrating Ask Sage, BigBear.ai seeks to offer a more differentiated AI solution in a less crowded segment of the market, leveraging its existing relationships within the defense and intelligence communities.

Despite some near-term operational headwinds, BigBear.ai's stock performance has been robust, surging 153.7% over the past year. This rally reflects renewed investor confidence following the balance sheet repair and the strategic pivot. The company's focus on secure, mission-ready AI solutions for high-stakes environments provides a compelling long-term narrative, appealing to investors seeking exposure to AI applications with stringent security and reliability requirements.

BigBear.ai: Operational Headwinds and Investor Scrutiny

While BigBear.ai's strategic pivot and fortified balance sheet present a compelling long-term vision, the company faces significant operational headwinds and investor scrutiny in the near term. Its revenue performance has been uneven, with a 20% year-over-year decline to $33.1 million in the third quarter of 2025. This contraction was primarily attributed to lower volumes on certain Army programs, underscoring the inherent exposure to government procurement cycles and program delays that BigBear.ai aims to mitigate with its new strategy.

Profitability metrics also paint a challenging picture. BigBear.ai's gross margin slipped to 22.4% in Q3 2025 from 25.9% a year earlier, indicating pressure on its core services. The company's trailing 12-month (TTM) gross margin stands at 27.3%, significantly lower than SoundHound's. Furthermore, adjusted EBITDA swung to a loss of $9.4 million in Q3 2025, as selling, general, and administrative (SG&A) expenses rose to support growth initiatives. The TTM operating margin of -46.7% and net margin of -301.4% highlight substantial ongoing losses.

The company's valuation, while lower than SoundHound's, still reflects a premium for its AI focus. BigBear.ai trades at a TTM price-to-sales (P/S) ratio of 9.93, and a forward 12-month P/S of 17.23X, roughly in line with its industry average. However, given its recent revenue softness and ongoing losses, some analysts question whether this valuation is justified without clearer signs of operational improvement and successful integration of Ask Sage. The consensus analyst rating for BBAI is "Hold," with a median price target of $6.00, suggesting a more cautious outlook than for SoundHound.

Adding to the complexity, BigBear.ai has been the subject of multiple investor alerts and investigations by law firms, such as Pomerantz LLP, regarding potential claims on behalf of investors. While the nature of these investigations is not fully detailed, they introduce an element of uncertainty and potential legal risk that investors should consider. BigBear.ai's next earnings report on April 29, 2026, will be crucial for demonstrating progress on its strategic pivot and addressing its profitability challenges.

Which AI Stock Offers Stronger Potential for 2026?

When evaluating SoundHound AI and BigBear.ai for stronger potential gains in 2026, a comparative analysis reveals distinct risk-reward profiles. SoundHound AI, with its focus on commercial conversational AI, demonstrates superior operational momentum and a clearer growth trajectory. Its revenue growth of 84.6% (FY2024 YoY) significantly outpaces BigBear.ai's 2.0% (FY2024 YoY) growth, indicating stronger market adoption and execution in its chosen segment. SoundHound's improving gross margins, at 39.7% (TTM), also suggest a more scalable business model compared to BigBear.ai's 27.3% (TTM) gross margin.

However, SoundHound's richer valuation, with a TTM P/S of 22.14, reflects these higher growth expectations. Its substantial operating and net losses, at -217.6% and -210.7% respectively, mean that profitability remains an elusive goal, despite management's aim for a breakeven operating profile in 2026. The stock's performance over the past year, down 10.6%, suggests that investors are cautious about the valuation premium given the ongoing losses.

BigBear.ai, on the other hand, presents a more complex picture. Its strategic pivot towards platform-driven growth in the defense sector, bolstered by the Ask Sage acquisition and a strong cash position of $456.6 million, offers a compelling long-term narrative. The stock's impressive 153.7% surge over the past year indicates renewed investor confidence in this strategic shift. Its lower TTM P/S of 9.93 makes it appear more "value-oriented" compared to SoundHound, but this is offset by its slower revenue growth and even larger TTM net losses of -301.4%.

Ultimately, for investors seeking significant gains in 2026, SoundHound AI appears to have the clearer edge. Its rapid revenue acceleration, expanding gross margins, and diversified commercial applications provide a more tangible path to growth in the near to medium term. While profitability remains a hurdle, the operational improvements are more pronounced. BigBear.ai's transformation is promising, but the integration risks of Ask Sage, coupled with its historical revenue volatility and deeper losses, suggest that its potential upside may take longer to materialize. The "Buy" consensus from analysts for SOUN, with a median target of $14.00, versus a "Hold" for BBAI with a median target of $6.00, further reinforces this perspective.

In the high-stakes world of AI, both SoundHound and BigBear.ai are speculative plays, but SoundHound's operational momentum and broader market appeal position it more favorably for outperformance in the coming year. Investors should closely monitor both companies' upcoming earnings reports for further clarity on their respective paths to sustainable growth and profitability.

Want deeper research on any stock? Try Kavout Pro for AI-powered analysis, smart signals, and more. Already a member? Add credits to run more research.