Small-cap stocks, which fell sharply in 2022 amid the Fed’s aggressive rate hikes, have seen renewed interest from investors over the last month - and in fact, small-cap stocks have outperformed their large-cap counterparts over this time frame.
Typically, small-cap companies have a market cap between $250 million - $2 billion, and many investors consider them to be the “next” Apple (AAPL) or Amazon (AMZN). Small-cap companies, by design, tend to be a lot more volatile and riskier as compared to large caps, and are also prone to frauds as well as “pump and dump” price action, given their low floats.
That said, and as some might argue, quite a few large caps of today were the small caps of previous years. Investors with a high risk appetite can dabble in small caps with a small portion of their portfolio in anticipation of making superior returns, while also staying cognizant of the higher risk associated with them.
Right now, I believe Fisker (FSR) and Chegg (CHGG) are the 2 best small-cap stocks that look like good buys for 2024.
Fisker Is a “Show Me Story” for 2024
Fisker stock fell to record lows in 2023, even as U.S. electric vehicle (EV) market leader Tesla (TSLA) more than doubled on the year. There are multiple reasons why Fisker stock dropped in 2023. These include the departure of key personnel, delayed earnings filings and admission of “material weaknesses in internal controls,” a 2023 production guidance cut, as well as reports that some Fisker car buyers are not happy with the vehicles, and some are even contemplating canceling their reservations.
Fisker has recently begun the deliveries of its Ocean SUV, and has also ramped up its sales and logistics to better support sales. However, I believe it is a “show me story” for the coming year, as it needs to earn back its reputation as a viable EV player in an overcrowded industry.
FSR Stock 2024 Forecast
Fisker has received a consensus rating of “Hold” from analysts. Of the 10 analysts covering the stock, 3 rate it as a “Strong Buy” while 3 more call it a “Hold.” The remaining 4 rate the startup EV company’s shares as a “Strong Sell.” Its mean consensus target price of $4.25, however, is nearly three times the current price levels.
The company’s market cap is right around $508 million, while analysts expect it to post revenues of $2.14 billion in 2024, which would imply a 2024 price-to-sales multiple of under 0.25x.
While Fisker is a speculative and high-risk EV play, I believe investors could warm up to some of the beaten-down EV plays in 2024 if they can impress with the execution. If Fisker can please the market with its operating and financial performance in 2024 and also sign up Foxconn to produce its upcoming models, the stock should see better days next year. That said, it remains a high-risk play, considering its precarious finances and weak balance sheet.
Chegg Looks Like a Good Small Cap to Buy for 2024
Chegg looks like another good small-cap stock to buy for 2024. The former “stay-at-home” darling has lost over half of its market cap in 2023, as investors continued to shed names from this once sought-after group.
The COVID-19 lockdowns helped drive revenues of companies like Zoom Video Communications (ZM), Teladoc Health (TDOC), and Chegg, as well as Peloton (PTON). However, the entire group has since crashed - to put it simply, their services now no longer appear as “critical” and irreplaceable as they were during the lockdowns.
However, I find Chegg a good stock to buy based on its strong financials and reasonable valuations. The edtech company is expected to post revenues of $710 million in 2024, which is similar to what analysts expect it to post in 2023.
Chegg Generates Healthy Cash Flows
The company boasts of over 70% gross margins and expects to generate $170 million in free cash flows on $220 million in adjusted earnings before interest, tax, depreciation, and amortization this year.
To put that in perspective, Chegg's market cap is just around $1.3 billion. The company has a strong free cash generation capacity and has been using the cash to retire its convertible debt as well as for share repurchases.
While Chegg’s revenue growth has been stagnant, a pivot to artificial intelligence (AI) and international expansion should help revive its growth. Chegg trades at a next 12 months (NTM) price-to-earnings multiple of under 10x, which makes it an attractive small-cap stock to buy.
While stay-at-home winners might never again see the kind of growth that they saw during the COVID-19 lockdowns, at these prices, Chegg looks like a small-cap stock with attractive risk-reward, given its current valuations.
On the date of publication, Mohit Oberoi had a position in: CHGG , AMZN , AAPL , TDOC , PTON . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
