The stock market has historically delivered an average-annual return of about 10% since 1927. After falling in 2022, the major indexes have risen to new highs this year and are kicking off a new bull market. This means investors could be looking at a long stretch of good returns, considering that bull markets tend to last longer than bear markets.
Let's look at two promising tech stocks that could deliver significant gains over the next decade.
1. Soundhound AI
New bull markets are often led by stocks of high-growth companies that are disrupting old ways of doing things. From that perspective, it's no surprise that leaders in artificial intelligence (AI) delivered huge gains for investors last year. Soundhound AI (SOUN 1.83%) is a leader in voice assistance that is seeing interests for its technology from automotive companies, restaurants, and Internet of Things (IoT) product makers.
NASDAQ: SOUN
Key Data Points
The productivity gains from using AI could add trillions of value to the global economy, and we can see this playing out in the number of restaurants that are starting to use Soundhound's Smart Ordering product. Many leading restaurant brands are using Smart Ordering to process customer orders, including Chipotle Mexican Grill, Five Guys, Applebee's, and Jersey Mike's. The company's revenue, which is partly generated from royalties and subscriptions, jumped 73% year over year last quarter.
The stock rocketed to a high of $10.25 earlier this year before selling off to its current share price of around $5. These wild swings are the name of the game for small-cap growth stocks. But investors should prepare for more volatility until the company can prove it can deliver profitable growth. It reported a net loss of $33 million, or $0.12 per share, last quarter.
Meanwhile, investors are already valuing the business at an expensive price-to-sales (P/S) multiple of 25. This high valuation implies the expectation for higher margins over time, so the risk is that it fails to successfully monetize its voice technology.
The good news is that Soundhound AI's focus on earning royalties and making money from subscriptions should lend itself to a profitable business over the long term. Indeed, its gross margin of more than 70% is consistent with other profitable software companies, so investors should expect the company to see progress on the bottom line as it continues to win new customer deals.
Assuming the company continues to execute on cost controls, the long-term upside for this small-cap stock could be massive.
2. Constellation Software
Finding relatively underfollowed stocks that are growing at above-average rates is a good strategy to find long-term winners. Constellation Software (CNSWF 2.34%) doesn't get a lot of coverage on Wall Street, since the company is headquartered in Canada and trades over-the-counter. But the stock has delivered massive gains for investors driven by compound-annual growth of over 20% in the company's revenue and free cash flow over the last 10 years.
OTC: CNSWF
Key Data Points
Constellation is delivering these gains by making profitable acquisitions in the vertical-software market. These are software companies that are not competing with Microsoft or other tech giants. Constellation owns numerous software companies serving financial services, agriculture, education, homebuilding, retail, among many other markets.
Constellation has a long track record of delivering outstanding returns for shareholders. The company was founded in 1995 by Mark Leonard, who still leads the business as president. A $10,000 investment just 14 years ago would already be worth $1.1 million.
The stock is not cheap, trading at a price-to-free-cash-flow multiple of 31. The main concern here is that Constellation runs out of opportunities to make acquisitions and grow the business.
However, Constellation continues to find plenty of opportunities. Revenue grew 27% in 2023, driven mostly by acquisitions. Importantly, free cash flow grew 36% to $1.1 billion, showing how management only buys cash-flow-positive companies that contribute to Constellation's profitability.
The vertical-software market is expected to grow at an annualized rate of 12.9% over the next 10 years to over $512 billion, according to Future Market Insights, so Constellation should have ample opportunities to deliver returns for shareholders.
