Artificial intelligence (AI) promises to shape our world in profound ways in the decades to come. One of the main expected benefits it can bring is significant cost and time savings for businesses and consumers. Goldman Sachs Research projects a 7% increase, or nearly $7 trillion, added to the global economy just from language processing tools like generative AI.
While the "Magnificent Seven" stocks offer great (and potentially safer) ways to invest in AI, some investors are looking to take a chance on smaller companies that could grow much faster and deliver even bigger returns from AI adoption. If this describes what you're looking for, here's why C3.ai (AI 3.02%) and Soundhound AI (SOUN 5.77%) are two promising stocks worth considering right now to buy and hold over the next decade.
1. C3.ai
C3.ai is an emerging leader in helping businesses and the government build AI applications. The company has grown substantially over the last few years, and this momentum sent the stock soaring in the first half of 2023 before pulling back.
Wall Street is concerned about increasing competition and potential impact on C3.ai's profitability. While C3.ai has grown revenue at double-digit rates, it's not profitable yet. One risk is that tech companies could undercut C3.ai on pricing by bundling AI development tools with their existing cloud services.
However, it may not be that easy for a well-financed tech giant to compete against C3.ai. The company has a patented AI platform that allows a software developer to add a new AI model to an application instead of writing the code from scratch. And other than a temporary slump in growth earlier last year, C3.ai hasn't had any problem finding customers for its offering. It reported fiscal third-quarter revenue of $73 million -- nearly double its quarterly revenue in the same quarter four years ago.
Revenue increased by 17% year over year in the October-ending quarter, but investors should expect this rate of growth to accelerate over the next few years. C3.ai transitioned to a consumption-based revenue model, where it charges customers based on their usage of the platform. This could significantly boost growth as the transition runs its course.
The stock trades at a price-to-sales ratio of 9.7, which is typical for fast-growing cloud and software companies. Analysts expect annual revenue to reach $443 million in two years -- 55% higher than C3.ai's trailing-12-month total. Investors should expect the stock to rise on par with that growth.
2. Soundhound AI
Another major opportunity in the world of AI is voice assistance. We don't need industry estimates to see how big this opportunity is; we just need to look at Soundhound AI's accelerating revenue growth.
In the third quarter, revenue of $13.3 million grew 19% year over year, but more impressively, it grew 52% over the previous quarter. Soundhound AI offers a promising technology that is seeing growing adoption from the automotive and restaurant industries.
SOUN Revenue (Quarterly) data by YCharts
One of the many highlights in the last quarter was the announcement of a new collaboration with Samsung to make a new display technology for voice AI drive-thrus at White Castle. This could be a promising start for the company as it looks to win more customers throughout the quick-service industry.
The risk for Soundhound is failing to profit from its technology. It reported a loss of $20 million last quarter, although that was a major improvement over the year-ago quarter's $30 million loss.
Soundhound has a potentially lucrative business model based on earning royalties, subscriptions, and ad revenue from speech recognition services powered by its technology. It holds over 120 patents, with over 140 patents pending. Investors should expect the company to continue moving toward breakeven as it wins new customer deals for its technology and grows revenue.
Growth expectations are high, with the stock commanding a P/S ratio of 9.4. As long as the company makes progress toward turning a profit, the returns from here could be substantial over the next decade.
