While Big Tech has dominated the stock market storyline over the past 18 months, basking in the glow of artificial intelligence (AI), small-caps are finally stepping into the limelight as well. Driven by rising hopes for interest rate cuts this September, these smaller players are ready to take the lead - particularly after Wednesday's unimpressive Q2 earnings from the likes of Tesla (TSLA) and Alphabet (GOOGL) dragged the Nasdaq Composite ($NASX) to its worst session since 2022.
Tom Lee, head of research at Fundstrat, sees big potential in small-cap stocks, thanks to June's surprisingly low CPI. The analyst believes this is the “green light” for small caps to keep rallying, forecasting a near 50% rally in 2024. Supported by several positive drivers, Lee views small caps as presenting the most compelling investment opportunity in the near term.
As small caps steal attention from Big Tech, here’s a closer look at three small-cap stocks with a “Strong Buy” rating on Wall Street, and double-digit upside potential to analysts’ mean price targets.
Small-Cap Stock #1: Archer Aviation
Valued at $1.41 billion by market cap, California-based Archer Aviation Inc. (ACHR) is soaring ahead in urban air mobility with its innovative electric vertical takeoff and landing (eVTOL) aircraft. Designed for air taxi services, Archer's eVTOL aims to transform city transportation, offering seamless urban travel. As a leader in aviation electrification, Archer is pioneering the next transportation revolution with its cutting-edge technology.
While shares of this flying taxi company have plunged almost 29% on a YTD basis, over the past month, ACHR stock has bounced back with a 17% return.
On May 9, the pre-revenue company reported its Q1 earnings results, which met Wall Street’s bottom-line predictions. Archer’s loss during the quarter stood at $116.6 million, or $0.36 per share.
By the end of Q1, Archer Aviation boasted a strong liquidity reserve of $523 million, with $406 million in cash and $117 million in accessible debt and equity funds. This solid financial footing enables Archer to continue investing heavily in aircraft development, and fuels its bold ambitions for a successful commercial launch.
Beyond these financial metrics, the company’s Q1 revealed impressive advancements in its flagship eVTOL, Midnight. Midnight’s flight test campaign is rapidly gaining momentum, with Archer achieving over 100 flights in Q1 and staying on track to surpass their 400-flight goal for the year.
Furthermore, last month, Archer received a significant boost when the Federal Aviation Administration (FAA) granted the company a key certification, which brings Archer a major step closer to launching its electric air taxi service - paving the way for the future of urban air travel.
The company is now focused on FAA certification for Midnight, a pivotal milestone that Archer is diligently working to achieve. For Q2, which is scheduled to be announced after the market closes on Thursday, Aug. 8, management anticipates non-GAAP operating expenses ranging between $80 million and $95 million.
Analysts tracking Archer Aviation project the company’s loss to narrow by 21.3% year over year in fiscal 2024, and shrink by another 14.3% in fiscal 2025.
ACHR stock has a consensus “Strong Buy” rating overall. Of the seven analysts in coverage, five suggest a “Strong Buy,” one recommends a “Moderate Buy,” and the remaining one gives a “Hold” rating.
The average analyst price target of $8.64 indicates a notable potential upside of 97.3% from the current price levels. The Street-high price target of $12.00 suggests that the stock could rally as much as 173.9%.
Small-Cap Stock #2: Similarweb
With a market cap of about $511 million, Israel-based Similarweb Ltd. (SMWB) is a web analytics company that fuels business success by unveiling online trends and empowering data-driven decisions that keep users ahead in the digital race. The company’s essential digital data and analytics, as well as user-friendly products, help businesses craft strategies, optimize customer acquisition, and boost monetization.
Shares of Similarweb have soared almost 22% on a YTD basis, overshadowing the broader S&P 500 Index’s ($SPX) return of 13.8% over the same time frame.
Similarweb reported its Q1 earnings results in early May, which sailed past Wall Street’s forecasts on both the top and bottom lines. Total revenue surged to $59 million, marking a 12% year-over-year improvement. Plus, in Q1, the company managed to cut its loss to just $0.03 per share, a sharp improvement from the loss of $0.15 per share recorded in the year-ago quarter.
Non-GAAP operating profit per share hit $0.04, a notable turnaround from the adjusted operating loss per share of $0.09 in Q1 of fiscal 2023. During the quarter, the company generated $9.7 million in free cash flow. As of March 31, the customer base soared to 4,844, reflecting a 16% increase compared to the previous year.
Commenting on the Q1 performance, CEO Or Offer said, “We delivered strong momentum on the bottom line, with a third consecutive quarter of non-GAAP operating profit and a second consecutive quarter of positive free cash flow. Our recent acquisition of Admetricks and the launch of SAM, our AI-powered Sales Assistant Module, demonstrate our continued investment in enhancing our unique data and solutions."
For Q2, scheduled to be released on Aug. 6, management projects total revenue to range between $60 million and $60.5 million, representing about 12% year-over-year growth. Additionally, non-GAAP operating profit is expected to range between $1.5 million and $2 million. Looking forward to fiscal 2024, the company anticipates total revenue to land between $242 million and $246 million, also reflecting around 12% annual growth.
Analysts tracking Similarweb project the company to trim its GAAP loss by an impressive 60.5% year over year in fiscal 2024, with another 26.7% improvement expected in fiscal 2025.
Overall, analysts' view on SMWB stock is bullish, with a unanimous "Strong Buy" rating from all seven analysts in coverage.
The average analyst price target of $10.83 indicates expected upside potential of 66% from the current price levels. The Street-high price target of $14 suggests that the stock could rally as much as 115%.
Small-Cap Stock #3: Dave Inc.
Founded in 2015, Los Angeles-based Dave Inc. (DAVE) is a leading U.S. neobank and fintech trailblazer, serving millions of Americans. By leveraging disruptive innovations, Dave offers best-in-class banking services at a fraction of the cost of traditional banks, revolutionizing the financial landscape. The company’s market cap presently stands at $438 million.
Dave's shares have rallied a staggering 564% over the past 52 weeks and 321% on a YTD basis, dwarfing the broader SPX’s returns during both periods.
Shares of Dave surged 12.4% on May 7 after the company announced its impressive Q1 earnings results. Total operating revenue surged 25% year over year to $73.6 million, largely due to improvements in member retention and Average Revenue Per User (ARPU).
In addition, adjusted EPS hit $0.62, marking a remarkable turnaround from the adjusted loss per share of $0.63 incurred in the same period last year. As of March 31, the company held approximately $101.5 million in cash, cash equivalents, and marketable securities.
CEO Jason Wilk said of the Q1 results, “Despite the seasonal patterns which typically temper ExtraCash demand in the early part of the year, we originated over $1 billion in ExtraCash advances during Q1, up from Q4 and a 32% increase from Q1 2023, while we continued to markedly improve credit performance as a result of our CashAI underwriting engine.”
The CEO further expressed confidence in establishing Dave as the top banking choice for everyday Americans in 2024. Encouraged by the strong start to fiscal 2024, management raised its adjusted EBITDA guidance for the entire year, which is now projected within the range of $30 million and $40 million. Also, total operating revenue is anticipated to range between $305 million and $325 million.
Analysts tracking Dave project the company to reduce its GAAP loss by 95.7% year over year in fiscal 2024 and swing to a profit of $1.77 per share in fiscal 2025.
DAVE stock enjoys a strong bullish sentiment, with all four analysts in coverage sharing a unanimous "Strong Buy" recommendation - up from a single “Hold” three months ago.
The average analyst price target of $64.50 indicates a potential upside of 82.3% from the current price levels. The Street-high price target of $75 suggests that the stock could rally as much as 112%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
