Issac Newton first presented his three laws of motion in 1686. The first law of motion, arguably the simplest yet most relevant of all three, states that an object at rest will remain at rest, and an object in motion will remain in motion unless acted upon by an external force.
The stock market has since made its own loose interpretation of Newton’s first law of motion. Investors call it “momentum,” and it’s a very real thing. The theory behind momentum in financial markets is that stocks which are trending lower, will likely keep trending lower, while stocks that are trending higher will usually keep trending higher, unless the stock is impacted by some external catalyst.
Because this theory of momentum in financial markets is a very real thing, it isn’t a bad investment strategy to narrow your stock picking down to stocks which have a ton of upward momentum. To be sure, not all of those stocks will keep trending higher. But the theory of momentum states that a group of red-hot stocks will have a higher chance of continuing to move higher than a group of otherwise random stocks.
With that in mind, I’ve compiled a list of small-cap tech stocks with a ton of upward momentum at the present moment. And by a ton of momentum, I mean a ton of momentum. These are all sub-$10 billion market cap companies which have seen their stock prices more than double over the past three months.
Will they all stay hot? No. But some of them will, and that alone makes this group of hot small-cap tech stocks worth a look.
Cardlytics (CDLX)
Market Cap: $2.2 billion
Trailing 3-Month Gain: 124%
Why It’s Been So Hot: Payment card analytics company Cardlytics (NASDAQ:CDLX) leverages credit and debit card data to pair marketers with consumers and power relevant and strong bank loyalty and rewards programs. This business model is pretty new. But it’s starting to take off, with Cardlytics growing from one major bank partner — Bank of America (NYSE:BAC) — and 50 million active users in late 2017, to three major bank partners — adding JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) — and nearly 150 million active users today. As this business model has taken off, Cardlytics has powered significant revenue growth.
Will It Stay Hot or Not: Although CDLX stock is very richly valued here, I suspect that shares will continue to march higher for the foreseeable future. That’s because this is the first part of a huge growth narrative for Cardlytics. Over the past several years, Cardlytics has focused on getting banks and purchase data. They’ve got those now, with all major banks in the U.S. lined up as partners and purchase data on one out of every two card swipes in America. Over the next several years, Cardlytics will focus on getting merchants and marketers to partner with them. Because they already have all the data and all the banks, this should be pretty easy to do, as marketers will be attracted by Cardlytics’ reach and targeting abilities. Consequently, the growth narrative here will remain robust for a lot longer, meaning that the rally in CDLX stock has legs.
EverQuote (EVER)
Market Cap: $946.9 million
Trailing 3-Month Gain: 92.6%
Why It’s Been So Hot: Small but rapidly-growing online insurance marketplace operator EverQuote (NASDAQ:EVER) has delivered monstrous growth numbers over the past few quarters, the sum of which have driven EVER stock up 92.6% over the past three months and up 542% over the past 12 months. Investors are celebrating the big growth numbers as proof that EverQuote’s data advantages are starting to kick in (EverQuote leverages consumer data to match insurance buyers with insurance sellers), and are buying EVER stock on the premise that as EverQuote gets bigger, these data advantages will only get bigger, and the growth narrative will only become more robust.
Will It Stay Hot or Not: Investors should tread carefully with EVER stock. While shares may keep rocking higher on the back of big traffic growth numbers, there is a lot of controversy surrounding this company, including a lot of negative consumer reviews, some contradictory web traffic data from SimilarWeb, and a ton of insider selling. On top of all that, shares are richly valued (70-times earnings that are two years out), the stock appears technically overbought (the stock price is essentially double the stock’s 200-day moving average), and more than a third of the float is short (about 35%, according to YCharts). Thus, while I don’t recommend stepping in the way of this huge upside rally in EVER stock, I don’t believe that chasing the rally is a good idea, either.
NIO (NIO)
Market Cap: $4.39 billion
Trailing 3-Month Gain: 176%
Why It’s Been So Hot: Three big things have propelled shares of Chinese premium electric vehicle (EV) maker NIO (NYSE:NIO) to triple over the past three months. First, the company reported strong third quarter numbers which — among other things — underscored that the company’s delivery trends are dramatically improving heading into 2020. Second, there have been reports that NIO’s at-risk balance sheet will be shored up soon by a big investment from Guangzhou Automobile. Third, easing U.S.-China trade tensions alongside a pause in EV subsidy cuts have paved the path for a big rebound in China’s EV market in 2020.
Will It Stay Hot or Not: NIO stock will stay hot for the foreseeable future. Not almost “200% upside in three months”-hot, but shares will continue to trend higher, because the company’s delivery numbers will continue to impress over the next few months amid a new car launch and rebounding EV demand in China. Also, confirmation of a big investment from Guangzhou Automobile or some other entity will ease liquidity risks and provide additional firepower for shares to keep marching higher.
Eros (EROS)
Market Cap: $403 million
Trailing 3-Month Gain: 93.6%
Why It’s Been So Hot: Shares of little-known Indian entertainment company Eros (NYSE:EROS) have rallied more than 150% over the past three months because the company’s streaming efforts have gained meaningful traction. Long story short, Eros is a small Indian film company that is trying aggressively to build a next-gen streaming business and turn into the Netflix (NASDAQ:NFLX) of India. That streaming business, dubbed ErosNow, has gained momentum in 2020, both through sustained subscriber growth and some headline partnerships with YouTube and Dolby (NYSE:DLB). As it has, investors have bought up EROS stock on the idea that Eros Now could one day be a formidable player in India’s huge streaming TV market.
Will It Stay Hot or Not: I have my doubts about EROS stock staying hot. Eros isn’t alone in trying to be the Netflix of India. Everyone else is trying to be that, too, including Netflix itself, who has pledged to spend $400 million on content development and acquisition in India over the next two years. Eros will have total revenues of about half that this year, so they simply don’t have the scale or resources to compete with the likes of Netflix. At the same time, given the household economics of India, it’s likely that this is a one streaming service per household market. So, if Eros can’t beat out Netflix or Amazon (NASDAQ:AMZN), then there’s little reason to believe the company will be all that relevant in this space.
As of this writing, Luke Lango was long NIO and NFLX.
