2 Stocks That Are 10 Baggers in the Making, Thanks to AI

It might not happen overnight, but artificial intelligence (AI) has the potential to impact society similar to the way the internet has since the late 1990s. The companies that best use AI could be market-beaters over the next decade.

What does that look like in motion? Consider two technology stocks: DigitalOcean (DOCN 3.30%) and SentinelOne (S 1.70%). Compared to other AI companies, these two have relatively small market caps at $3.5 billion and $4.3 billion, respectively. But their use of AI to compete in large and growing industries gives them a realistic shot at generating tenfold returns from their current prices over the coming years. Here's why.

This cybersecurity stock delivers cutting-edge solutions with AI

Justin Pope (SentinelOne): Cybersecurity has become indispensable to governments and businesses worldwide. An increasing amount of economic value is digital today: for example, sensitive information, classified files, or customer data. It's really expensive when hackers breach an organization; a breach costs U.S. companies an average of $9.44 million, according to IBM.

SentinelOne provides security and threat management services through its Singularity Platform. It refers to Singularity as a data lake, a centralized location where data is stored that is vetted in real time by machine learning and AI to identify malicious files and other threats. SentinelOne's security can automatically quarantine the bad actor and alert the appropriate party.

Third parties, such as the consulting firm Gartner, have recognized SentinelOne's product, awarding it leadership labels in endpoint security multiple times. The company also serves half the top 10 businesses in the Fortune 500 and more than 10,000 other customers.

Cybersecurity is ruthlessly competitive, and SentinelOne faces tough rivals like Microsoft and CrowdStrike. But it has continued growing rapidly, including 70% year-over-year revenue growth in the company's most recent quarter.

Endpoint security is SentinelOne's core product today. It registered $477 million in trailing-12-month revenue against an addressable market that could grow to $25 billion by 2030, which underlines its growth opportunities. And that's not including potential new products over the coming years.

The stock trades at a price-to-sales (P/S) ratio under 9 today, a far cry from its eye-popping P/S at more than 100 at its initial public offering. As long as SentinelOne's product sits near the cutting edge of the industry and growth continues, it's easy to see the company becoming far larger than its current sub-$5 billion market cap.

This cloud stock should sail in smooth waters after facing rough seas 

Will Healy (DigitalOcean): In the sea of cloud providers, talk of DigitalOcean often gets submerged in favor of Amazon, Microsoft, and other tech giants.

Nonetheless, it still has been able to stand out by targeting small and medium-size businesses (SMBs). And despite a $3.5 billion market cap, DigitalOcean offers benefits that large players cannot provide.

First, the company posts its pricing online, allowing SMBs to better fit cloud services within limited budgets.

Second, it maintains a DigitalOcean community using its customer base and documentation library. These resources help the entrepreneur or one-person IT department who might need to turn to this community to solve IT-related problems.

And the company estimates a potential market worth $195 billion by 2026, growing at a 26% compound annual rate.

So far, it serves only a small portion of this market. Revenue for the first quarter of 2023 came in at $165 million, rising 30% versus the same quarter last year. Its average revenue per user (ARPU) increased by 16% over the same period to $88.35.

The cloud stock sells for just 6 times its sales. While not a record low, DigitalOcean traded for more than 8 times sales for most of its history, indicating it has a reasonable valuation.

After a brutal bear market and a partial recovery, DigitalOcean trades at a 70% discount to its peak. Admittedly, that drop highlighted some concerns. Being a mid cap when its main competitors have market caps above $1 trillion is an ongoing challenge. Also, profitability under generally accepted accounting principles (GAAP) is still elusive, due to stock-based compensation and non-operating costs.

But its community is difficult for its peers to replicate, and its pricing model makes the cloud more accessible to SMBs. As cloud adoption increases, such enterprises will probably continue to turn to DigitalOcean, allowing it to cover more of that massive addressable market.