The "Magnificent Seven" are some of the most elite growth stocks around. Amazon was the worst performer of the group over the last five years, but it still delivered a market-beating 111% return. The best performer was Nvidia, which returned 2,830%.
However, after an incredible run in recent years, Wall Street has muted return expectations over the next year or so, which may reflect higher valuations for the group. The Magnificent Seven stock with the best near-term upside, according to analysts, is Google parent Alphabet, with 22% upside based on the average price target.
Investors looking for stocks with higher return potential should start their search in the small-cap arena. These are companies with market caps (share price times total shares outstanding) of less than $2 billion, and some are operating in exciting fields like voice recognition technology and electric aircraft that could experience strong growth in the coming years.
Here are two small-cap stocks with upside between 44% and 196%, based on the average Wall Street price target.
1. SoundHound AI
SoundHound AI(NASDAQ: SOUN) is a leader in artificial intelligence (AI)-powered voice technology that is seeing wide adoption with major brands in the restaurant and automotive industries. The company is posting impressive revenue growth that could send the stock higher next year. The average Wall Street price target is $7.79, according to YCharts, or about 44% above the current share price of $5.39.
SoundHound AI is a very small business, reporting just $13 million in revenue last quarter, but it's growing like there's no tomorrow. Revenue has consistently clocked in at more than 50% year over year recently. It could grow at high double-digit rates for several years as management pegs the addressable market for voice AI at more than $140 billion.
Some automotive brands recently upgraded to SoundHound Chat AI, which has accelerated customer engagement with SoundHound's products. The annual rate of queries with its voice AI platform reached 5 billion in Q2, up 90% year over year. The company has more than 15 years of data accumulation that has improved the accuracy of SoundHound's technology in understanding natural human speech, which gives SoundHound an advantage over competitors.
Stellantis, which owns several major car brands, including Jeep and Dodge, is using SoundHound Chat AI in its vehicles. SoundHound is also starting to see traction in other markets, including point-of-sale restaurant systems from Block's Square and Toast, in addition to millions of smart devices and TVs.
Investors should expect the stock to be volatile, since the company has yet to report a profit. However, it has a potentially lucrative business model built on earning royalties from volume usage of the product, in addition to subscription revenue. Over time, it could also generate growing revenue from commissions earned when someone completes a transaction using SoundHound's voice AI.
Management's guidance calls for revenue to exceed $150 million in 2025 as SoundHound integrates the acquisition of Amelia. This represents an increase of 83% over expected 2024 revenue. The stock has risen 212% over the last year but could reach the Street's price target in 2025 as SoundHound continues to report more robust growth and expand into new markets.
2. Archer Aviation
Urban air transportation could see incredible growth over the next few decades, particularly in the growing adoption of electric air taxi networks. Morgan Stanley has previously predicted the urban air mobility market to reach $29 billion by 2030 before surging to surpass $1 trillion by 2040.
As a leading manufacturer of electric vertical takeoff and landing aircraft, Archer Aviation(NYSE: ACHR) is well positioned to capitalize on this opportunity. Wall Street's average price target is $9.06, implying upside of 196% over the current $3.01 share price.
Archer has plans with Southwest Airlines and United to launch air taxi networks in major cities. It also has a manufacturing deal in place with Stellantis, which will fund up to nearly $400 million for labor and other capital expenditures for the production of 650 aircraft annually.
With a $6 billion order book, Archer is having no trouble raising capital to fund operations until it receives final certifications from the Federal Aviation Administration (FAA) to launch its commercial service. The company ended the second quarter with $360 million in cash and equivalents.
Wall Street has kept its price target fairly consistent over the last few years. The only thing that has changed is Archer's share price, which, after the recent sell-off, could be undervaluing the company's long-term growth. The long-term return potential is massive for a company with a market cap of just $1 billion.
The stock is a great buy at these lower share prices. The FAA has already finalized the airworthiness of Archer's Midnight aircraft, which sets the stage for the final stages of the certification process. Investors should buy the shares before news of the final FAA certification sends the stock higher.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard has positions in Archer Aviation, Nvidia, SoundHound AI, and Toast. The Motley Fool has positions in and recommends Alphabet, Amazon, Block, Nvidia, and Toast. The Motley Fool recommends Southwest Airlines and Stellantis. The Motley Fool has a disclosure policy.
