Mega-cap stocks are the center of attention in this age of artificial intelligence (AI). However, investing in small-cap stocks can provide significant growth opportunities, because they are often less established and have more room to grow.
Small-cap stocks have the potential for rapid expansion. Because these businesses are smaller and less mature, they may have more leeway to expand operations, introduce new products or services, or gain market share. However, they are also typically more volatile.
If you're seeking higher returns and are willing to tolerate higher volatility, investing in small-caps could be a wise move now. Here are two small-cap stocks with 40% to 60% upside potential over the next 12 months.
ACM Research Stock
As the demand for semiconductor chips surges amidst the digital transformation era, ACM Research (ACMR), a semiconductor equipment and materials manufacturer, is benefiting.
Valued at $1.5 billion, ACMR stock is up 38.2% year-to-date, outpacing the S&P 500 Index’s ($SPX) gain of 7.5%.
Founded in 1998, ACM Research specializes in developing, manufacturing, and selling semiconductor process equipment for wafer cleaning and polishing.
As semiconductor chip demand soared, ACMR experienced substantial revenue growth, driven by increasing demand for its advanced wafer cleaning and polishing solutions. Its position as an important supplier to the semiconductor industry allowed its revenue to jump from $107 million in fiscal 2019 to $558 million in fiscal 2023. Earnings surged from $0.33 per share to $1.63 per share over the same period.
In fiscal 2023, ACM's revenue increased by 43.4% year on year to $558 million. ACM's shipments, comprised of completed and pending deliveries (that haven’t been realized yet) increased by 11%. Adjusted earnings increased by a staggering 96.4%.
Recently, the company announced its preliminary first-quarter fiscal 2024 results. It expects revenue to be in the $150 million to $152 million range, representing a massive 102% to 105% increase. This expansion is anticipated to be fueled by a 163% to 169% increase in Q1 shipments to $235 million to $240 million.
The company reaffirmed its full fiscal 2024 revenue range of $650 million to $725 million, representing a 17% to 30% increase. Meanwhile, analysts expect revenue to grow by 25.4% to $699.4 million. Furthermore, in fiscal 2025, revenue and earnings are expected to increase by 23.8% and 26.7%, respectively. ACM will report its first-quarter results on May 8.
Trading at 13 times forward 2025 estimated earnings, ACMR stock is attractively valued now, given the potential growth that AI could generate in the semiconductor industry.
Following the Q1 preliminary results, Benchmark Co. analyst Mark Miller reiterated his "buy" rating on ACMR. According to him, the "substantial increase in shipments underscores the company's expanding operational capacity and market reach." Miller is impressed by ACM's growth trajectory and has set a $38 target price for the stock.
Overall, Wall Street rates ACMR stock a "strong buy.” Of the seven analysts covering ACMR, six have rated it a “strong buy,” and one has a “moderate buy” recommendation.
Its mean price target from analysts is $37.81, which is 40% above current levels. Plus. its high target price of $40 implies a potential upside of 48% over the next 12 months.
Digi International Stock
Digi International (DGII), established in 1985, has a history of serving the Internet. It provides Internet of Things ("IoT") products, services, and solutions to a wide range of industries, including healthcare, transportation, utilities, and retail.
Valued at $924 million, Digi stock has fallen 1% year to date to underperform the broader market.
One of Digi International's key strengths is its ability to meet the growing demand for IoT solutions across multiple sectors. This demand has increased its revenue from $254 million in fiscal 2019 to $444 million in fiscal 2023.
However, its recent second quarter of fiscal 2024 performance was lukewarm due to macroeconomic challenges. Revenue fell 3% to $108 million, while adjusted net income of $0.49 remained flat year on year. Yet, the company's annual recurring revenue (ARR) increased by 11%, reaching $110 million.
While IoT products, services, and solutions revenue fell in the quarter, ARR rose due to higher subscription revenue. Increasing ARR demonstrates customers' trust in Digi's products and services.
Management believes that the second half of fiscal 2024 will be difficult because the company is unsure when macroeconomic conditions will settle down and the normal sales cycle will resume.
As a result, Digi anticipates a 4% to 7% drop in revenue in the third quarter, falling between $103 million and $107 million. Adjusted net income could range between $0.47 and $0.51 per diluted share, compared to $0.50 in the same period last year.
For the full fiscal year 2024, Digi expects to achieve ARR growth of 5%, but revenue could be down 5% year-over-year. Meanwhile, analysts predict a 2.19% decrease in revenue to $435 million, followed by a 6.6% increase in fiscal 2025.
Looking ahead, management stated that the company remains committed to meeting its long-term goal of doubling ARR and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to $200 million within the next five years.
Overall, Wall Street rates DGII stock a "strong buy,” with a unanimous recommendation from all six analysts in coverage.
Its average price target is $41.50, which is 61.2% above current levels. Plus, its high target price of $45 implies a potential upside of 74.8% over the next 12 months.
