With the prospect of long-awaited interest rate cuts getting closer, small-cap stocks can emerge as top plays for investors seeking new ideas outside the usual mega-cap market leaders. Small-caps, which have lagged the market lately, can offer high growth potential - often with an attractive valuation.
By definition, small-cap companies carry a market capitalization between $300 million and $2 billion. Often, these names don't get a lot of attention - until after they've already broken out as leaders within their industry.
Notably, small-cap stocks offer both high potential and higher risk. That's why it's crucial to invest wisely in these under-the-radar companies. When evaluating stocks, I use multiple metrics, including enterprise value-to-sales ratio and price-to-sales ratios, to compare them to other firms within their sector and find them at a discounted rate.
As for these two picks, Oppenheimer analysts have highlighted both names in their small-cap growth breakout list, featuring stocks the brokerage believes are poised for robust growth. So, without any further ado, let's discuss these two overlooked companies, and see whether these underdogs might be worth adding to your portfolio this July.
#1. NerdWallet
Founded in 2009, NerdWallet (NRDS) is a personal finance company that provides expert-driven content and financial tools to help consumers make informed decisions about various financial products and services. The company offers guidance on credit cards, loans, mortgages, investing, insurance, and everyday banking needs. With a mission to clarify financial choices for individuals, NerdWallet combines expert reviews, user-friendly calculators, and practical tips, helping users navigate their financial journeys with confidence and ease.
Valued at $1.18 billion by market cap, shares of Nerdwallet have soared by 76% over the past year, outshining the S&P 500 Index's ($SPX) gain of 26.7%. This robust performance is driven by strong earnings that exceeded analysts' expectations, and revenue growth powered by increased consumer engagement and successful product diversification.
In terms of valuation, NRDS shares are trading at a reasonable 1.70 EV/S ratio and 1.87 P/S ratio, both of which are a significant discount to the sector median. At this attractive valuation, investors can buy the stock at a discount and potentially profit as the market corrects its undervaluation.
NerdWallet has demonstrated remarkable growth over the past five years, as annual revenue grew from $228 million in 2019 to $599 million in 2023. Similarly, gross profit improved from $212 million to $545 million over the same time frame, a strong testament to the company's ability to grow earnings over the years.
In March 2024, the company reported its first-quarter earnings print, which beat analysts' expectations by a healthy margin. Revenue came in at $161 million, which topped consensus estimates, while GAAP income from operations arrived at $3.7 million, or $0.01 per share.
Despite its small market cap, Nerd is fundamentally a very solid company. Its balance sheet shows a free cash flow of $17.3 million for Q1, more than double its year-ago levels. These strong cash flows will help the company reduce debt and ensure financial stability to weather economic fluctuations.
Looking ahead, analysts expect NRDS to swing to a GAAP profit of $0.22 per share this fiscal year, with revenue projected to rise 5%. The projected return on equity is 11.5% within the next three years.
NerdWallet is getting some bullish coverage from Wall Street analysts, who recommend a "strong buy" rating with a mean price target of $18.33. This represents a 21.2% upside potential from its current price. Among 7 analysts who cover the stock, 5 maintain a "strong buy" rating, while the other 2 recommend a "hold."
#2. Similarweb
Founded in 2007, Similarweb (SMWB) is a leading provider of digital market intelligence, offering comprehensive insights into online behavior and trends across various industries. The company has established itself as a trusted partner for digital marketers, analysts, and strategists worldwide, helping them make informed decisions and optimize their online presence. Its innovative analytics platform leverages advanced algorithms and data science to deliver accurate and actionable data, driving growth and competitive advantage for its clients.
With a market capitalization of $567 million, SMWB stock has soared over 35% year-to-date, outperforming the broader market. This positive momentum is largely due to its well-received quarterly earnings in February, which sparked a Citi upgrade to "Buy." These developments have significantly impacted the market sentiment and contributed to the stock's YTD gains.
Regarding valuation, Similarweb shares are trading at a 2.31 EV/S sales ratio and 2.36 P/S ratio, both of which are a discount to the current tech sector median.
In the financial realm, Similarweb has shown consistent growth from top to bottom line over the years. In its May 7 earnings report, SMWB announced robust sales for Q1 2024 of $59 million, up by 11.8% year over year. Gross profit surged by 15% to $46.3 million, while adjusted EPS of $0.04 surpassed analysts' expectations by 2 cents per share.
During the quarter, the number of customers with annual recurring revenue (ARR) of $100,000 or more increased 10% year over year to 378.
Similarweb also has a strong balance sheet. With total assets of $219.4 million compared to total liabilities of $200.3 million, the company enjoys a robust financial standing without any debt obligations.
Like other companies, Similarweb is also gaining strength in the realm of artificial intelligence (AI). The firm recently introduced an open beta release of SAM, an AI-powered sales assistant. SAM integrates digital intelligence insights into the salesperson's daily workflow. It aims to provide valuable insights for sales teams by combining digital data with generative AI from large language models (LLMs).
Looking ahead, Similarweb is poised for robust growth. The company anticipates increasing its revenue by 12% in the upcoming quarter, estimated to be between $60 and $60.5 million. Similarly, full-year revenue growth is pegged at around 12%, with management looking for $242 million to $246 million.
Overall, analysts are quite bullish on Similarweb stock. All 7 experts in coverage rate the stock a "strong buy" with a mean price target of $10.83, which represents 51% upside potential from the current stock price.
