While large-cap stocks like Nvidia (NVDA) and Microsoft (MSFT) dominate the market, many small-cap stocks with strong fundamentals are overlooked. Small-cap stocks’ market capitalization ranges between $300 million and $2 billion.
Small-cap companies are frequently in the early stages of development, which can provide significant upside potential for investors if and when the companies reach their full potential. These businesses often have more room to innovate and grow.
Small-cap stocks may be riskier due to their higher volatility and potentially less stable business models. However, higher risk can lead to potentially higher returns. Let's take a look at three small-cap stocks that are poised to skyrocket over the next year.
#1. Recursion Pharmaceuticals
Recursion Pharmaceuticals (RXRX) is a clinical-stage “TechBio” company. It uses machine learning and artificial intelligence (AI) to speed up drug discovery. Its unique approach to drug discovery has piqued Wall Street's interest.
Recursion's stock, valued at $2.04 billion, is down 5.7% year to date, while the S&P 500 Index ($SPX) is up 13.7%.
Recursion's platform, Recursion OS, combines experimental biology and advanced computational methods. It can identify patterns and insights that conventional techniques may miss. This approach has the potential to significantly reduce the time and cost of bringing new drugs to market. The company's CEO recently made the same claim.
In an interview with CNBC’s Jim Cramer, CEO Chris Gibson claimed that their company can reduce the time between drug discovery and market entry from “five or six years and hundreds of millions of dollars into, perhaps, one or two years and just $10 million or $20 million.”
Recursion intends to achieve this through AI and machine learning. Last year, the company signed a $50 million deal with chip giant Nvidia (NVDA) and developed BioHive-2, an AI supercomputer that is four times faster than its predecessor, BioHive-1.
While this has the potential to be a game changer for Recursion, it still has to come to fruition, which may take years. Recursion has no approved products and remains unprofitable. The first quarter net loss stood at $91.4 million. Though Recursion has excellent long-term potential in the biotech industry, until the company achieves its goal, it represents a high-risk, high-reward situation for investors willing to take the risk.
Overall, Wall Street rates Recursion stock as a "moderate buy.” One analyst rates RXRX as a "strong buy," another as a "moderate buy," and the remaining five as a "hold." Its average target price of $13 indicates roughly 40% upside potential. Furthermore, its high target price of $17 implies a potential 82.7% gain over the next 12 months.
#2. Ardelyx
Ardelyx (ARDX) is another undervalued biotech name that Wall Street considers a "strong buy." The company focuses on developing and commercializing therapies for cardiorenal and gastrointestinal (GI) diseases. ARDX stock, valued at $1.5 billion, is up 9.6% year-to-date when compared to the broader market.
In the U.S., the company has two commercially approved products. Tenapanor, marketed as XPHOZAH, has shown promise in the treatment of hyperphosphatemia in chronic kidney disease (CKD) patients on dialysis. Since its launch in October 2023, XPHOZAH has generated $15.2 million in net product sales in its first full quarter of operation.
Tenapanor is also used to treat adult irritable bowel syndrome with constipation (IBS-C) under the brand name IBSRELA, which generated $28.4 million in net product sales in the first quarter. Ardelyx anticipates that IBSRELA will generate $140 million to $150 million in sales by 2024. Total revenue stood at $46 million, up from $11.4 million in the same quarter last year. Net loss dropped to $0.11 per share from $0.13 in Q1 2023.
The company is developing and commercializing tenapanor in other key markets, such as Japan, China, and Canada.
Analysts tracking the stock expect revenue to increase by 97.4% in 2024, and 61.2% in 2025. Analysts also expect the company to become profitable in fiscal 2025, with a profit of $0.10 per share.
Conditions such as hyperphosphatemia and IBS-C have few treatment options, leaving a significant opportunity for Ardelyx's novel therapies. Because it is still in its early stages, it would be an appealing addition for a growth-oriented investor with a long-term investment horizon.
Overall, Ardelyx stock is rated a "strong buy” on Wall Street. All ten analysts covering ARDX have rated it a "strong buy."
The average target price of $13.83 indicates that the stock has 106.7% upside potential. Furthermore, with a high target price of $16, the stock has the potential to rise by 139% from current levels.
#3. Magnite
Magnite (MGNI) is the third small-cap stock on my list that Wall Street expects to outperform this year. The company operates an independent sell-side advertising platform that enables the purchase and sale of digital advertising content across a variety of channels, such as desktop, mobile, audio, and connected TV (CTV). Magnite stock, valued at $1.8 billion, is up 48.4% YTD, compared to the overall market. Magnite's platform connects publishers and advertisers, optimizing ad inventory and increasing revenue. In the company's most recent first quarter, revenue increased 15% year-over-year to $149.3 million. Adjusted earnings per share (EPS) increased 25% to $0.05 during the quarter.
Management stated that the ad spend environment has shown a positive trend in 2024, and they expect this momentum to continue throughout the year. Netflix (NFLX) recently announced that it has chosen Magnite to run its global programmatic advertising business.
Analysts covering Magnite expect revenue and earnings to soar by 10.6% and 52.3% in 2024. Revenue and earnings are further expected to rise by 10.8% and 13.6% in 2025.
Trading at 15 times forward 2024 earnings, Magnite seems like a reasonable buy with great potential in the ad tech sector.
Overall, Magnite stock is a "strong buy” on Wall Street. Of the eight analysts covering MGNI, six have rated it a “strong buy” and two have assigned a “moderate buy” rating.
Its mean target price of $16.06 suggests the stock has 15.8% upside potential. Plus, its high target price of $20 implies the stock could go as high as 44.3%.
