Small-cap stocks are defined as those companies with a market cap of less than $2 billion — perhaps too small a figure as that strict definition has been in place for some two decades now, but we digress. At any rate, the digital economy is growing quickly and digital business models are highly profitable too. Investing early in a basket of small tech businesses could yield life-changing returns over time. Here to help you narrow the field of the thousands of small-cap stocks out there, three Fool.com contributors have picked Latch (NASDAQ:LTCH), Duolingo (NASDAQ:DUOL), and Super Micro Computer (NASDAQ:SMCI). Here’s why.
A tech platform for the real estate industry
Nicholas Rossolillo (Latch): Perhaps you were like me and were first introduced to Latch when former Facebook exec turned SPAC investor Chamath Palihapitiya called the company the “best SaaS [software-as-a-service] company I’ve ever seen/invested in.” Indeed, it’s too soon to tell just how successful this cloud software company will ultimately be, but it’s off to a hot start.
The company built an operating system for residential and commercial building owners called LatchOS, which integrates with a growing list of third-party connected hardware and Latch’s own smart locks, sensors, and building connectivity devices. Real estate is one of the oldest industries around, but it’s in need of some digital window dressings. Latch is delivering on that front big time, signing all sorts of deals with new project developments and retrofitting existing buildings with its software suite.
To illustrate this, the company reported a big increase in expected total bookings (money customers commit to spend with a firm) by the end of 2021. Management said it now expects bookings to end the year within a range of $325 million to $340 million (previously $290 million to $325 million), nearly double from last year. And while revenue is only just beginning to be realized (Latch signs deals with contract terms spanning an average of six years), guidance for that metric now calls for a range of $38 million to $42 million for full-year 2021 (previously $47 million to $51 million, as some projects have been delayed), implying year-over-year growth of at least 110%.
Latch stock fell hard following the earnings update due to the lower sales guidance, but this never was a growth story that would grow up overnight. Rather, it’s all about the next three to five years, during which time Latch expects those bookings to convert to actual revenue. Given how many new apartment and commercial complexes are signing on to use LatchOS, the future looks promising. The company is valued at a market cap of about $1.7 billion as of this writing, an expensive price tag right now, but a great long-term value if this small real estate technologist can continue executing on its fast trajectory.
Duolingo has a lot to learn — and teach
Anders Bylund (Duolingo): Language-learning specialist Duolingo has been around for an entire decade now, but the company entered the public stock market just two weeks ago. A lot has happened in the computerized educator’s early going, and I think this is the start of a fantastic long-term growth story.
Duolingo released its first earnings report as a public company on Wednesday. The number of daily and monthly active users landed less than 5% from the year-ago figures, but the company enjoyed fantastic growth in paid subscribers. A 46% year-over-year increase of that metric added up to 1.9 million names, driving subscription-based revenue 34% higher.
If the daily user trend looks disappointing, you should keep in mind that this quarter matched up against the darkest part of the coronavirus lockdowns in 2020. Like many other online learning and entertainment services, Duolingo saw a temporary spike in active user numbers last summer as millions of people put their free time to good use. Staying close to those lofty heights counts as a major victory in my book.
According to CEO Luis von Ahn’s prepared remarks from the earnings call, Duolingo addresses a global community of 2 billion language learners. With 40 million active users on the books in this report, Duolingo has a lot of raw growth potential ahead of it. Free users are also helpful to the company’s top and bottom lines, thanks to an effective advertising program.
On top of that, Duolingo is eyeing an even larger market in the long run. The company was built around an innovative learning platform that could be applied to other fields. Languages are really just a starting point for a wider platform. I see no reason why Duolingo wouldn’t eventually tutor students around the world in fields such as math, history, and social studies. Maybe even investing and personal finance. Where do I sign up?
That future should start to unfold over the next five to 10 years. I would be shocked if Duolingo hasn’t at least tripled its tiny $5 billion market cap by 2030. We may be watching a future giant of education services in the making.
Excuse me, it’s time to expand my budding Japanese skills by another tiny fraction. I have an unbroken five-year streak of daily Duolingo lessons to maintain.
This server stock is a growth company at a value price
Billy Duberstein (Super Micro Computer): The stock of server manufacturer Super Micro Computer didn’t react much after its recent earnings report, but there were a lot of positives within it.
Revenue was up 19% to $1.07 billion, and generally accepted accounting principles (GAAP) earnings per share (EPS) was $0.74, with both figures beating analyst estimates. While the company forecast somewhat softer sequential numbers, the current quarter is usually a seasonally down quarter, so that’s not a surprise. Moreover, this being the company’s fourth fiscal quarter, management also decided to give full-year guidance for the year ending June 2022. Super Micro now expects between $4.1 billion and $4.5 billion in 2022 revenue, up 21% at the midpoint over 2021, and EPS of “at least” $2.60, which would mark 24.4% growth over 2021.
Super Micro still has a bargain-basement valuation of around 14.6 times the 2022 earnings estimate — a figure that should probably be viewed as conservative. In fact, on the conference call with analysts, CEO Charles Liang said the company’s guidance was conservative, factoring in supply chain issues that may limit the company’s ability to fulfill demand.
How is Super Micro growing so fast? Well, before it became a beaten-down value stock, Super Micro was actually a fast grower in the server industry, historically outgrowing the sector by a wide margin. Yet in 2017 and 2018, the company was hit with an accounting scandal that actually caused the stock to be de-listed. In response, Super Micro had to slow its growth and focus on cleaning up its internal financial controls. The good news was, the scandal only had to do with revenue recognition, not fabricated sales. So, once a new financial team and modern controls were put in place, the stock was eventually relisted to the Nasdaq in January 2020.
Meanwhile, Super Micro has been evolving its offerings. In July, the company completed its new Taiwan campus, which will lower overall costs by boosting margins and opening up its business to new cost-sensitive customers such as cloud computing giants. Super Micro has also been building a software and services business to augment its core server business, which should also boost growth and margins going forward.
Thanks to these new growth initiatives, Liang sees a path to $10 billion in revenue sooner than expected, perhaps by 2025 or even earlier. If the company were to achieve that number — which would mark a tripling over 2021 revenue — shares are a huge bargain right now. With a market cap just under $2 billion and more cash than debt on the balance sheet, Super Micro is a small-cap stock well worth your attention.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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