Finding stocks that can leap 10x in a decade is no easy feat. While they're out there, they are rare, but they do have some characteristics that investors can use to pinpoint stocks with that kind of potential.
One stock that many point to is SoundHound AI (SOUN 7.10%), but is that a stock that can realistically grow by a factor of 10 in a decade? Or is it destined to fail at this lofty goal?
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SoundHound AI is expanding into multiple industries
SoundHound AI's product line centers around combining audio recognition technology and artificial intelligence. This isn't a new concept, and has already been integrated into our lives with digital assistants like Siri and Alexa. However, both of these models perform poorly, making them unusable in applications where getting something wrong isn't acceptable.
NASDAQ: SOUN
Key Data Points
SoundHound AI's models perform a lot better than these legacy assistants and have been found to outperform human counterparts' accuracy during tasks like drive-thru order taking. Additionally, SoundHound AI's products are seeing adoption in the healthcare and financial industries, replacing humans in some over-the-phone interactions.
If SoundHound AI can develop a product that seamlessly integrates generative AI-powered agents in places where humans can be replaced, this offers significant cost savings potential for companies. This is one factor investors must search for when identifying stocks with the potential to jump 10x in a decade: They must have a product that can expand across multiple industries. I think SoundHound AI displays this characteristic, qualifying for the next phase of searching for a company with 10x potential: sustained growth.
SoundHound AI's current growth rate is fast enough to achieve this goal
For a company to grow 10x in a decade, it must generate a compound annual growth rate (CAGR) of just under 26%. That's a rapid growth rate for a long time; although there may be companies growing at a faster clip than that, it's rare to do it for a decade. However, SoundHound AI may be just the company to achieve that.
During its Q2 results, it grew revenue at a 217% pace, far exceeding the required growth rate to jump 10x in a decade. However, some of that growth was attained via an acquisition, which skews the figure. What investors should be focused on is the organic growth rate, which measures how quickly existing businesses grow during the period. While management didn't specifically break out the organic growth rate, they noted that it was 50% or greater, which is what the company has historically generated. Furthermore, they projected that this growth rate is expected to persist for the foreseeable future.
While that may not imply a decade, if SoundHound AI can generate 50% growth over the next five years, that takes it a long way in achieving the goal of 10x returns in a decade.
SoundHound AI's valuation causes some headwinds
One thing that could hold SoundHound AI back from delivering a 10x return in a decade is its valuation. SoundHound AI is already a highly valued stock, and a fair bit of future growth has already been priced in.
SOUN PS Ratio data by YCharts
Fifty-four times sales is an expensive stock price, as most software companies trade between 10 and 20 times sales. This means that if SoundHound trades at a more reasonable valuation (say about 18 times sales), it must double three additional times. This substantially changes the growth required to deliver 10x returns in a decade.
If SoundHound AI were to be valued at 18 times sales and have a market cap of $74 billion (10 times that of today's level) a decade from now, the company would need to grow revenue at about a 37% pace.
That's still under the 50% organic rate that management projects for the "foreseeable future," so SoundHound AI could deliver 10x returns over one year. Still, it will be a very long and difficult road. If investors pick up shares of SoundHound AI today, they'll need to watch the growth rate while ignoring the noise surrounding the stock. This will give them the best indicator of success, and potentially provide 10x returns in a decade.
