Say ‘tech,’ and it’s become natural to think of the FAANG stocks – Facebook, Amazon, Apple, Google, and Netflix. These companies dominate their sector; among them are the first, third, fourth, and fifth largest publicly traded companies, the market’s only $2+ trillion company, and two companies valued over $1 trillion.
But the FAANGs are not the only options for tech-minded investors. The tech sector has attracted some of the business world’s sharpest minds, and they have brought scores of interesting and innovative companies to the public’s attention. The small-cap tech companies – at market values below $2 billion, they are dwarfed by the FAANGs – can offer investors a lower-cost entry to the world of tech stocks, along with considerable upside potential.
Wall Street’s stock analysts make their reputations by spotting these small-cap opportunities – and letting the investing public know. We’ve opened the TipRanks database and pulled up three under-the-radar stocks that received a thumbs-up from the analysts. There is upside here, along with some risk – but for investors willing to shoulder that, here are some unexpected picks from the Street.
SharpSpring, Inc. (SHSP)
2020’s push toward increased remote work, and online business generally, has put a premium on digital marketing solutions. SharpSpring is one of the companies which has been able to take advantage of that. The company offers a suite of Software-as-a-Service solutions for sales automation, marketing analytics and testing, social media and email, and CRM.
The value of this platform to online marketers is clear from SharpSpring’s latest Q3 results. Specifically, revenue grew 28% year-over-year to reach $7.3 million, a company record. While SharpSpring operates with a net loss, not unlike many other small-cap tech peers, the Q3 loss was only half that of the year-ago quarter.
Looking forward, SharpSpring has revised its full-year 2020 revenue estimate upwards, to the $28 million to $29.4 million range. This would represent a 28% to 30% net increase year-over-year. The company attributes the projected gains to strong recurrent revenue figures.
Covering the stock for Needham, 5-star analyst Scott Berg noted, "We believe SHSP offers small and micro-cap investors compelling exposure to the $16B plus marketing automation space at an attractive valuation at 5.8x our FY21 revenue estimate, which incorporates multiple growth vectors not incorporated in the consensus forecast. Armed with fresh growth capital, we believe SHSP's modern solution with a lower TCO is competitively positioned to take share among larger and better-known vendors.”
Everything that SHSP has going for it convinced Berg to rate the stock a Buy. Along with the call, the analyst attached a $25 price target, suggesting 52% upside potential from current levels.
SHSP is not widely covered by the Street’s analyst corps; among those who do cover the stock, however, the consensus is a Strong Buy. SHSP shows an average price target of $19.50, implying room for ~19% upside from the current trading value of $16.39.
Porch Group (PRCH)
Next up, Porch Group, is at heart an online marketplace. The company started out as Porch.com, connecting homeowners with an important commodity: high quality, reliable, home improvement contractors. The home improvement market is huge, valued at $500 billion annually. Porch Group, whose services now include software and services tailored to the home inspection and warranty segments, the moving segment, and professional contractors, in addition to home maintenance, and home improvement support for homeowners, has been working to monetize this vast market since 2013.
The company has been around for more than 7 years, but only entered the public markets this past December. The move to public trading was conducted through a merger with a special acquisition company (SPAC), PropTech acquisition. The new ticker, PRCH, began trading on December 24. The business combination agreement that moved Porch Group onto the NASDAQ index also brought the company $322 million in new capital.
Among the bulls is Benchmark analyst Daniel Kurnos, who writes of Porch, “After several changes in historical company strategy, we believe the current iteration is well positioned to capitalize on the rapidly growing home services software market.”
Getting into specifics, Kurnos adds, “The economic backdrop looks primed for home service and sale related companies next summer… The user base is relatively sticky – software offerings include the #1 inspector and moving service platforms, while a personalized move assistant and insurance offerings keep consumers in the system… As primarily a software company attached to the home services space, valuation looks relatively inexpensive.”
In light of his comments, Kurnos rates PRCH a Buy. His $24 price target indicates the extent of his confidence – a 88% one-year upside.
Overall, there are 2 recent reviews on this stock, and both are to Buy, making the analyst consensus a Moderate Buy. PRCH shares are priced at $12.77 and have an average price target of $20.50, for a 60% potential upside in the year ahead.
PubMatic is another marketing and advertising software company; it’s niche is developing software and strategies for online advertisers and digital publishers. The company’s platform works for publishers, media buyers, and app developers, and boasts over one trillion daily advertiser bids and 134 billion daily ad impressions across its customer and user base.
This is another company that launched on the public markets just last month. PUBM shares began trading on December 9, through a traditional IPO. The company priced the initial offering at $20 – but interest was strong and the stock opened at more than $25. The first day’s trading closed with the stock at $29.45. The company raised well over the $115 million target of the IPO.
Describing the market opportunity, RBC analyst Shweta Khajuria told clients: "PubMatic addresses a large and attractive segment of the advertising market with powerful secular tailwinds including Programmatic, CTV, Digital Video, and Supply Path Optimization (SPO). We believe PubMatic can sustain healthy topline growth (~20%) with robust margins."
The analyst added, "We estimate PubMatic’s global TAM, which includes Digital (ex-Social and Search) plus TV, to be ~$260B by 2021. Assuming that all global TV ad spend shifts to Connected TV (CTV) eventually, PubMatic’s more immediate TAM or global revenue opportunity from the $260B global ad spend translates to $29B."
Khajuria's bullish comments support her Outperform (i.e. Buy) rating, and her $34 price target implies growth of 32% in 2021.
Survey says… Wall Street agrees. A grand total of five out of six ratings published in the past two months say PUBM is a “buy.” The consensus price target on this stock stands at $34.80 a share — and 35% upside for buyers today.