3 small-cap tech stocks that could soar in the next bull market

Tech stocks have seen big gains this year, led by companies involved in the current buzz around generative artificial intelligence (AI). But the broader market is still waiting for the start of a new bull market, and the economy is still trying to absorb the impact of the Federal Reserve’s interest rate hikes.of S&P400 (mid-cap index) and russell 2000 (the small-cap index) has barely moved over the past 12 months after taking a big hit in 2022.

^MID chart

Data by YCharts.

Three small, unfollowed tech stocks have fared particularly poorly during this period. But for investors with some patience, all three companies could still have very promising futures. Here’s why:

1. Ubiquiti: Few stocks are brave enough to follow

Robert Pera is in a tough situation in 2023. Not only has the NBA team he has owned since 2012 (Memphis Grizzlies) not been in the best shape since the start of the 2023-24 season, but so has his company. ubiquity (UI -0.06%) The company’s stock price fell more than 50% by 2023.

Pera, Ubiquiti’s founder, CEO, and chairman, probably cares a lot about that. He owns over 93% of the company’s total outstanding shares.

Enterprise hardware sales remain weak this year as many companies are in cash-saving mode. Consumer electronics products such as networking, smart home, security, and related office equipment also fell. Even after sales surged at the height of the pandemic, there is still excess inventory that needs to be addressed.

Ubiquiti itself has a large amount of excess inventory. While revenue was relatively stable (down 7% year over year in the first quarter of fiscal 2024 (ending September 2023)), the resulting free cash flow took a big hit. Recently, sales to enterprise and network service provider customers have cooled, leading to a surge in inventory and a consequent decline in profitability.

UI Revenue (TTM) Chart

Data by YCharts.

That is likely the reason why Ubiquiti’s stock price has deteriorated. It doesn’t help that Pera and his company stopped holding quarterly conference calls several years ago to explain their efforts to overcome these headwinds. Ubiquiti also hasn’t made any share buybacks since the beginning of 2022, instead only paying quarterly dividends (currently yielding 2.1% annually). These factors may also be causing the market to avoid Ubiquiti stock.

However, Ubiquiti has a proven track record of profitable growth since its 2011 IPO. And now may be a good time to buy as investors worry about networking hardware companies. The stock trades at 18 times trailing 12-month earnings per share, possibly its highest price in years.

I’ve considered the idea of ​​starting a small position at Ubiquiti in the past, but this time I might actually bite into the expectation that demand for its networking and security hardware will eventually increase.

2. Shift4 Payments: Betting on the international push for best-in-class hospitality payments

shift 4 payment (four 0.72%) is a small but rapidly growing digital payment acceptance provider. The company started with his POS solution for face-to-face transactions specifically for the hospitality industry. It’s been more than 20 years since founder and CEO Jared Isaacman launched his Shift4, and its core customers – hotels, restaurants, and other small businesses and businesses – continue to grow at a steady pace. I am.

In fact, since its IPO in 2020, Shift4’s subsequent 12-month revenue has grown from less than $1 billion to nearly $2.4 billion in its last reported year. This includes early in the pandemic, when much of the company’s core customer base was not allowed to conduct in-person business.

In recent years, Shift4 has expanded in new directions, including expanding its payment network to encompass online (no physical card present) transactions. Our clientele has also grown to include NBA and NFL sports and entertainment venues.

But the next big move will be international. Shift4 has just completed the acquisition of his small business called Finaro, which already has a foothold in Europe. Shift4 hopes its low-cost POS system and behind-the-scenes payment acceptance network will help it replicate its success in the US.

Shift4 is small compared to larger peers such as PayPal and blockbut it’s profitable and profit margins are expanding rapidly.

4 free cash flow charts

Data by YCharts.

After a roller coaster ride since becoming a public concern, this is a top small-cap payment stock to own for the next few years, especially if a new bull market finally begins to move in this rough-and-tumble part of the stock market. there is a possibility. I bought it this summer, so I might add more to my portfolio soon.

3. SkyWater Technology: A small specialized chip factory is making big strides

In a world where semiconductors are becoming increasingly important, investors tend to focus heavily on the largest semiconductor manufacturing companies, including: taiwan semiconductor manufacturingSamsung, and intel. But one small chip factory — a facility that makes silicon wafers that are cut into “chips” and packaged into electronic systems — believes there is room to pursue a smaller niche.

sky water technology (Skyte -2.68%) It started as a spinoff from Cypress Semiconductor (now part of a large German chipmaker). infineonSkywater derives most of its revenue from contracts with the U.S. Department of Defense, but it is gaining momentum by forming development partnerships with startups and other companies that need specialized semiconductor technology.

We would like to emphasize that SkyWater is a small business and investing in such businesses involves additional risks. Revenue for the third quarter of 2023 increased 37% year-over-year, with total quarterly sales of just $71.6 million. As might be expected for a plant this small, SkyWater isn’t profitable, at least not yet. Third quarter GAAP net loss was $7.6 million, primarily due to plant start-up costs as manufacturing activity began to pick up pace again.

But one potentially positive development for SkyWater’s continued growth and long-term progress toward profitability is that the chip design software giant cadence design system currently offers SkyWater development kits to customers. That could increase interest in Skywater’s small-scale plant.

Either way, keep in mind that this is the riskiest of the three stocks on this small- and mid-cap stock list. SkyWater has a lot to prove and will rely heavily on attracting new customers and helping existing customers ramp up chip production with primarily experimental projects. And with a market capitalization of just $320 million as of this writing, the company is well at risk of being crushed by its much larger peers.

Skywater has shown enough promise for me that I’ve earned a very small initial position, but if it continues to make positive progress I might add to it. Other top chip stocks remain my main bets on computing technology, but Skywater still has the potential for significant future growth.

Nicholas Rossolillo and his clients work for Block, Cadence Design Systems, PayPal, Shift4 Payments, and SkyWater Technology. The Motley Fool has positions in and recommends Block, Cadence Design Systems, PayPal, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel, Shift4 Payments, and Ubiquiti and recommends the following options: A long January 2023 $57.50 call on Intel, a January 2025 $45 call on Intel, and a short December 2023 67.50 put on PayPal. The Motley Fool has a disclosure policy.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button