Finding stocks that can increase in value tenfold in a decade is a dream of every investor. Such investments can be rare; for a company to rise 1,000% in a decade, it needs to be operating in a rapidly expanding industry.
What bigger industry is there than artificial intelligence (AI) right now? I think this is a great place to search for companies with the potential to post monster returns over the next decade, even though there have already been some winners.
One that I think is primed to dominate over the next decade is SoundHound AI (SOUN 4.86%). It's still a relatively small company with a mere $6 billion valuation. However, I could easily see it becoming a $60 billion company a decade from now if a few things go in its favor.
Image source: Getty Images.
SoundHound AI's technology is spreading
SoundHound AI merges audio recognition with AI. This allows it to perform better than traditional digital assistants, such as Siri or Alexa.
Its products have extensive applications: Any business interaction that humans typically need with one another (such as assistance over the phone or taking a drive-thru order) can be automated by the company's technology.
While historical applications of audio recognition technology have performed relatively poorly, SoundHound AI's platform can actually outperform human counterparts in many examples. We're still in the early innings of its product being deployed at a large scale, but it is finding significant utility in the restaurant industry, automaking (as digital assistants in vehicles), financial services, and healthcare.
NASDAQ: SOUN
Key Data Points
SoundHound AI is also putting up impressive growth as its customer base quickly expands. In the second quarter, revenue increased 217% year over year to $43 million.
That quarterly report said that seven of the top 10 global financial institutions are SoundHound clients, and four of them either renewed their contract or increased their usage. That's huge momentum and shows that savvy clients are getting a lot of value out of its product.
This increased revenue will allow the company to refine its product further and create a platform that may be barely distinguishable from a human counterpart. We'll see how SoundHound AI progresses over the next few years, but management is incredibly excited about its growth trajectory.
The stock isn't cheap, but it's hard to value a company growing as quickly as it is
One factor that's influencing SoundHound AI's rapid growth is some acquisitions it made over the past few years. It's easy to grow when you're buying up companies, but what investors truly care about is organic growth.
This occurs from existing business and is what drives a company higher over the long run. Chief financial officer Nitesh Sharan said that management sees 50% or greater organic growth for the foreseeable future on an annual basis.
If SoundHound AI can deliver 50% organic growth over the next six years, it would increase its revenue tenfold. That could provide investors with the 10x return over a decade that they are seeking, but only if the stock is reasonably priced.
SOUN PS Ratio data by YCharts; PS = price to sales.
At 43 times sales, SoundHound AI isn't cheap by any means. But I'm not going to fault the market for how it's valuing this stock when it's tripling its revenue year over year and projecting a 50% annual organic growth rate in the coming years. When compared to another AI software provider, Palantir, which trades for 125 times sales, the stock actually looks pretty cheap.
SoundHound AI isn't without risk. Nothing is stopping one of the other AI hyperscalers from launching a competing product. This could significantly disrupt its business model and make it difficult to grow at the projected rate. Also, the company is deeply unprofitable, and it will need to flip the profitability switch sometime in the future.
However, as long as investors size their position appropriately, I think there could be monster upside in the stock. Keeping a position size small can ensure that you capture the upside while also limiting the downside if the stock goes to $0. SoundHound AI has the potential to be a huge AI winner, but it could also lose depending on how successful its product is or if a worthy competitor arises.
