While some popular growth stocks have rebounded strongly from their June lows and once again rich valuations, it’s still not hard to find fast-growing, small-cap tech companies with products or services. unique ones that seem very reasonably priced.
Here are three small caps that I think fit that description. As always, investors are advised to do their own research before taking a position in any of the companies mentioned. Additionally, it’s worth bearing in mind that small-cap growth stocks are often both more volatile and less liquid than their larger counterparts.
1. Valens Semiconductor (VLN)
Market capitalization: $431 million
Evaluation: Valens has an enterprise value (EV – market cap minus net cash) equal to 3.1 times consensus 2022 revenue estimate of $116 million and 2.4 times consensus 2023 revenue estimate of $188 million. These multiples are lower than those sported by many other chip developers with similar gross margin (GM) profiles.
The Elevator Pitch: Valens is an Israeli developer of high-speed video connectivity chips for commercial audio/video equipment and cars. The physical layer (PHY) characteristics of its chips are a competitive advantage in areas such as reliability, latency and power consumption. For now, the lion’s share of Valens’ revenue comes from the commercial AV market, where he has won design contracts with OEMs such as Logitech (LOGI), Samsung and Sony (SONY) for video conferencing equipment, industrial/medical equipment and commercial signs, and where it benefits from remote working/learning trends. But in the long term, the automotive market, where Valens’ chips provide connectivity for high-resolution cameras and other sensors used for ADAS and autonomous driving, is a bigger opportunity. With a GM already over 65%, Valens has a clear path to become very profitable as revenues grow.
Risks: Valens faces competition from major chip vendors such as Broadcom (AVGO), Marvell (MRVL), Texas Instruments (TXN) and Microchip (MCHP). For now, its auto chip sales are heavily reliant on a single automaker (Mercedes-Benz), although the company said more than 30 automakers and auto suppliers are evaluating its new VA7000 chips. With many enterprise hardware OEMs building up inventory over the past two years, Valens’ commercial AV business could see some inventory corrections. The company is generating (moderate) losses for now, which could make its shares vulnerable to broader selling pressure on long-lived stocks caused by inflation/interest rate fears.
2. BlackSky Technology (BKSY)
Market capitalization: $253 million
Evaluation: BlackSky has an EV equal to 3.3 times 2022 revenue consensus of $65 million and 1.8 times 2023 revenue consensus of $118 million.
The Elevator Pitch: Using a proprietary constellation of high-resolution satellites, BlackSky provides subscription-based imagery and analysis services to businesses and government agencies. The analytics capabilities of its platform, which merges satellite imagery with other data sources (news stories, IoT sensors, etc.) and AI/machine learning models to provide insights, are a plus competitive, as is the frequency at which BlackSky’s satellites can provide imagery for a place of interest. The company has partnerships with companies such as Palantir (PLTR) (also an investor), Airbus and mapping software company Esri. Corporate interest in gaining intelligence from satellite imagery is expected to be a long-term growth driver for commercial sales, while geopolitical tensions/crises are already becoming a growth driver for its government sales. Long-term contracts with US government agencies provide a measure of revenue visibility. BlackSky’s cost structure (high fixed costs, but relatively low marginal costs to support more customers/workloads) should drive large increases in its GM (currently in the mid-30s) as revenues grow .
Risks: BlackSky faces competition from larger/older satellite imagery companies such as Maxar (MAXR) and Planet Labs (PL). For now, much of its revenue comes from a relatively small number of government contracts. While the company has $111 million in cash and says it expects to be highly profitable by 2025, it is generating significant losses for now (its only free cash flow estimate for 2023 is of negative $68 million). The long-term risks that apply to Valens apply even more to BlackSky.
3. Luna Innovations (LUNA)
Market capitalization: $195 million
Evaluation: Luna is trading 45 times a 2022 EPS consensus estimate of $0.13 and 21 times a 2023 EPS consensus estimate of $0.28. However, its EV is equal to only 1.9 times revenue consensus of $112 million in 2022 and 1.7 times revenue consensus of $131 million in 2023 (for now, earnings are depressed by large investments in sales and costs related to mergers and acquisitions).
The Elevator Pitch: Luna (unrelated to the failed cryptocurrency) manufactures a variety of fiber-based test, measurement, and sensing products. Its offerings, which provide high-precision measurement and sensing for things like temperature, motion, strain, thickness and pressure, range in cars, planes, factories, oil and gas pipelines. , telecommunications networks and many more. Current growth drivers include the adoption of electric vehicles (Luna sells products that test electric vehicle battery temperatures), building 5G networks, increasing border security, and investments in oil and gas. gases, the adoption of silicon photonics in data center hardware (Luna sells products that make it easier to design/test silicon photonics), and the increasing use of composite materials that require active stress monitoring /deformations. Public spending bills could boost demand. The company’s recent acquisition of peer LIOS Sensing expands its industrial/infrastructure reach, while the recent sale of its Luna Labs unit makes it pure-play measurement/sensing. The differentiated nature of Luna’s products (many of which are patent-protected) is driven by the company’s high GM (61% in the second quarter), which, combined with operating leverage, is expected to drive EPS growth to significantly outpace revenue growth going forward.
Risks: The fiber optic test/measurement space includes a number of players, including some large companies such as Viavi (VIAV) and KeySight (KEYS). Cost inflation/supply chain pressures could potentially become a bigger headwind for margins. A deeper macroeconomic downturn could impact various Luna end markets. Luna has seen healthy inventory growth in recent quarters (the company says it built up inventory to deal with supply chain risks).
The market capitalization data and consensus estimates of the companies discussed in this article are provided by FactSet.
(Please note that due to factors such as low market capitalization and/or insufficient public float, we consider VLN, BKSY and LUNA to be small cap stocks. You should be aware that these stocks are subject to more risks than the shares of large companies, including greater volatility, lower liquidity and less publicly available information, and that releases such as this may affect their stock prices.)
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