The stock market is having a bad year -- all investors know that. The technology sector has been hit particularly hard with some individual stocks shedding 90% of their value from their all-time highs. But let's hit pause on the last nine months and tune out the noise by looking at the long-term picture.
History is proof that the broader markets always recover to new highs given enough time. Even the Global Financial Crisis of 2008 -- where two major banks collapsed -- is now just a blip on the chart of the benchmark S&P 500 index. And we all witnessed how quickly the stock market bounced back during the current once-in-a-century pandemic.
Therefore, investors who are concerned about the recent downturn should select stocks with the potential to grow consistently over the long run. Here are three small tech stocks worth less than $10 billion now but could surpass that level (and then some) by the time 2030 comes around.
1. Zillow Group: Potential upside of 20%
Zillow Group (Z -0.23%) (ZG -0.26%) is bringing the real estate industry into the digital age, and the company is in the middle of a major transformation. Last year, it decided to shut down its direct buying (iBuying) segment, which was its main revenue driver. It turns out that purchasing thousands of homes and trying to flip them for a profit works great when the housing market is broadly rising, but it can result in catastrophic losses when it takes a dip -- in this case, it stung Zillow with about $881 million in losses during 2021.
Now, the company is expanding its suite of online real estate services and building a "housing super app" designed to offer end-to-end solutions for home buyers and sellers. Zillow estimates that the average home sold in the U.S. incurs about $17,000 in fees, stemming from closing services to mortgages. The company is only capturing about $4,100 of that at the moment, and its goal is to grow that figure because it's low-risk revenue with a much higher profit margin than its now-defunct iBuying business.
Overall, real estate service fees could be a $300 billion annual opportunity. Zillow's digital presence is already the largest in the industry, with 2.9 billion hits across all channels in the second quarter of 2022, from 234 million unique monthly users. Therefore, it's already in the best position to dominate. It will take time before the company can fill the revenue hole left by its iBuying segment, but it could generate $2 billion in 2023 and aims to build toward $5 billion in 2025.
Zillow is worth $8.3 billion right now, so if it reaches its 2025 sales estimate and continues to grow thereafter, it should breeze past a $10 billion valuation by 2030.
2. Duolingo: Potential upside of 156%
Duolingo (DUOL -0.02%) stock is down 5% in 2022. That would be a bad result in most other years, but it's a far smaller drop than the Nasdaq-100 tech index, which has shed 28% of its value. Duolingo is outperforming because its digital language education business is proving to be resilient in very challenging economic conditions.
The Duolingo mobile application has been downloaded more than half a billion times. It turns language learning into a gamified, engaging experience -- or in other words, the direct opposite of a typical classroom experience. Duolingo had 49.5 million monthly active users in the second quarter of 2022, of which 3.3 million were paid subscribers; the latter figure jumped 71% year over year.
It has become the highest-grossing app in the education category across both Apple's App Store and Alphabet's Play Store. The company thinks it could generate up to $367 million in revenue for the 2022 full year, and if it hits the mark, it will have grown the metric at a compound annual rate of 50% since 2020.
If that pace keeps up, it implies Duolingo's current valuation of $3.9 billion could soar far beyond $10 billion by 2030. In fact, even half that growth rate would comfortably get the job done.
3. C3.ai: Potential upside of 566%
Artificial intelligence (AI) is set to transform the corporate world, and so it's no surprise that C3.ai (AI -1.75%) has the most growth potential of this bunch. According to a report by McKinsey & Company, up to 70% of all companies will be using AI in some way by 2030, adding $13 trillion in output to the global economy.
C3.ai delivers AI applications to 228 business customers right now. It provides them with the foundations to implement the technology for a range of tasks, whether they're in manufacturing, financial services, or even oil and gas. In fact, fossil fuel giant Shell uses C3.ai to monitor 13,000 pieces of equipment, which alerts it to potential failures, saving both costs and potential environmental damage.
Such companies may not be able to develop AI in-house from scratch without a partner like C3.ai, whether it's for a lack of resources or the inability to attract technical talent.
If C3.ai's management can effectively capitalize on its AI leadership position, all the company's potential will be well within reach. The company is worth just $1.5 billion right now, yet it has over $900 million in cash and short-term investments on its balance sheet and expects to deliver $270 million in revenue for fiscal 2023 (ending April 30), so the market is placing very little value on the actual business amid the broader tech market sell-off. That's an opportunity because C3.ai predicts its addressable market could top $596 billion by 2025, so there is plenty of room for growth.
