Turning $10,000 into $1 million over a decade isn't easy. Only a handful of stocks accomplished this feat, but nothing stops a stock from doing this if it is dominant in an important emerging trend.
No trend is bigger than artificial intelligence right (AI) now, and SoundHound AI (NASDAQ: SOUN) is right at the center of the movement. But does it have the ability to transform $10,000 into $1 million over the next decade?
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SoundHound AI would need to become a fairly sizable company to achieve this feat
Turning $10,000 into $1 million requires the stock to increase in value by 100 times. So, let's see what a company 100 times the size of SoundHound AI would look like.
Currently, SoundHound AI has a valuation of $4 billion. To meet the 100 times growth threshold, SoundHound AI would need to grow into a $400 billion company from today's prices. Companies that are currently valued around that level include giants like Netflix ($507 billion) and Oracle ($450 billion). Some software companies that are near (but not quite at) that level include Palantir Technologies ($296 billion) and Salesforce ($276 billion).
So, SoundHound AI would need to establish itself as one of the great software companies in the U.S. to meet this goal, but there is one caveat to this argument.
Companies are continuously growing larger. A decade ago in 2015, the world's largest company was Apple with a $724 billion valuation. Now, Apple is worth 4 times that at $3.1 trillion. There has been some extraordinary growth in the market over the past decade, and investors shouldn't expect the same level of returns moving forward. But the market tends to double every seven years, and rises around 150% every decade. Using that information, we'll get more suitable companies to compare with SoundHound AI.
Instead of looking at $400 billion companies, we're now looking at around $150 billion companies. Shopify and Spotify are near these levels, and each emerged over the past decade.
With that in mind, SoundHound AI could grow to be a company this size without too much stretch, but it would need to become a household name.
SoundHound AI is delivering growth above the minimum threshold already
SoundHound AI allows users to use an audio signal rather than text to input an AI model. This is key in many situations, such as driving or ordering food.
SoundHound AI is experiencing phenomenal growth, with revenue rising 151% year over year to $29 million in Q1. If that revenue figure sounds small, that's because it is. Finding stocks that can grow 100 times over their current size requires starting from a small base.
But what kind of growth does SoundHound need to maintain to grow 100 times in a decade?
For something to increase at a 100-times growth pace, it must grow at a compound annual growth rate (CAGR) of 59% for a decade. This is the minimum growth threshold SoundHound AI will need to continue over the next decade for its revenue to increase at a 100-times pace. That's assuming its valuation, which is already very high, wouldn't change.
At 36 times sales, SoundHound AI's stock isn't cheap. Most software stocks trade for around 10 times sales, with the best fetching a 20 times sales premium. However, most software stocks aren't growing at a 150% year-over-year pace, so SoundHound AI deserves this premium.
Management expects revenue to rise by 97% in 2025, so it will easily meet the minimum growth threshold. However, the problem isn't year one; it's years two through 10, and SoundHound AI will have to continue growing at this rapid pace for a long time to increase in value 100 times potentially.
Is it possible? Absolutely. Is it probable? Likely not.
Regardless, SoundHound AI is growing rapidly in an important industry. Even if it doesn't turn $10,000 into $1 million, it could still be a successful investment, and it might be worth considering buying shares today as a potential ticket to market-crushing growth.
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Keithen Drury has positions in Salesforce and Shopify. The Motley Fool has positions in and recommends Apple, Netflix, Oracle, Palantir Technologies, Salesforce, Shopify, and Spotify Technology. The Motley Fool has a disclosure policy.
