This has been a bull market for tech stocks. The tech-heavy NASDAQ Composite, somewhat incredibly, now has rallied 410% in the past 10 years.
More narrow, tech-focused indexes have done even better. The Philadelphia Semiconductor Index, for instance, is up nearly 582%. Meanwhile, the S&P 500 Index is up 202% in that period.
The past decade’s seen the big names driving the tech rally and grabbing the headlines. After all, it was only in 2018 that Apple (NASDAQ:AAPL) became the first company to reach a $1 trillion market capitalization. That figure seemed almost outlandish at the time; Apple now is worth $2.296 trillion. It’s been joined in the trillion-dollar club by Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL).
Smaller tech stocks haven’t performed quite as well. The Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT) has actually lagged the NASDAQ over the past decade. PSCT still has gained 308% over that stretch — but in context, the performance is somewhat disappointing.
Small-cap stocks in any sector are higher-risk and generally more volatile. They should outperform large-caps in a bull market. They haven’t.
Of course, one reason for the underperformance is the precise reason why large-cap names have done so well. The benefits of scale appear even larger in tech. With so many “winner-take-most” markets (think Google in search), companies that fall behind often stay behind.
That makes small-cap investing in tech a potentially dicey proposition. There is no shortage of companies that can skyrocket with only modest market share gains. But getting those seemingly modest gains is easier said than done.
Investors need to focus on smaller names with a clear edge. Here are seven to consider:
- Yext (NYSE:YEXT)
- Sonos (NASDAQ:SONO)
- Opera (NASDAQ:OPRA)
- BTRS Holdings (NASDAQ:BTRS)
- Semtech (NASDAQ:SMTC)
- Zix (NASDAQ:ZIXI)
- Limelight Networks (NASDAQ:LLNW)
Smaller Tech Stocks: Yext (YEXT)
Yext is an intriguing cross between a “Big Data” play and a search business. The company’s Knowledge Graph includes structured data chosen by the customer, which then provides answers on the customer’s website and across the web.
Yext has taken a hit from the novel coronavirus pandemic, given that a reasonable chunk of its customers comes from the hospitality industry. But the company still should grow revenue about 18% in fiscal 2021 (ending January), after a 31% increase in FY2020. Growth should re-accelerate in FY2022 and beyond.
Yet YEXT stock looks reasonably cheap, at least by tech and software stock standards. It trades at roughly 7x FY2021 revenue. Profitability doesn’t arrive for some time, at least according to Wall Street estimates, but Yext still is investing in its business and driving what should be sticky, long-term customers. To be sure, there are weaker stories in this market trading at much higher valuations.
Certainly, investors are starting to see the quality of SONO stock itself. The stock has doubled over the past year, and rallied 350% from March lows. Those gains follow a fade from Sonos’ 2018 initial public offering; SONO entered 2020 up just 5% from its IPO price.
The rally of late has been driven by sharply improved results. The worry might be that those results are benefiting from the pandemic itself. Stuck-at-home consumers upgraded their sound systems, which might simply have pulled forward revenue from 2021 and 2022.
With SONO stock now trading at 44x forward earnings, that is a real risk, and likely the biggest risk to the shares. But this still should be a company set to capitalize on the growth in connected devices. There’s a case to wait for a pullback, but long-term investors still should give both SONO stock and Sonos speakers a close look.
Internet browser developer Opera doesn’t look impressive at first glance. Its market share according to one report is barely 2%, putting the company in sixth place. In the U.S., Opera’s brand recognition likely is close to zero.
But Opera makes a good product. It’s built on the same architecture as Google’s Chrome. Opera claims to be the fastest browser out there, and it may offer more personalization options than most.
Meanwhile, Opera isn’t just a browser company anymore. It’s launched a microlending business in Kenya and moved into retail sales of cellular phones and airtime in Asia and Africa. Given how investors are treating Jumia Technologies (NYSE:JMIA) at the moment, those operations should be considered to have some value, even if they’re not yet profitable.
All told, there’s an intriguing, multi-faceted, international tech story here. And with OPRA stock trading at 16x forward earnings, valuation remains reasonable. There should be a way for the stock to find some upside somehow.
BTRS Holdings (BTRS)
One of the many special purpose acquisition companies (SPACs) to execute a merger over the past year, BTRS Holdings is the holding company for Billtrust. Billtrust provides invoicing, payments, and professional services for B2B transactions.
It’s an attractive business. Obviously, the payments space is hot right now, and Billtrust seems to have an interesting niche. Market growth should be solid as more payments and related processes move to the cloud and to automated solutions like those offered by Billtrust.
At roughly 20x guided non-GAAP revenue for 2021, BTRS stock isn’t cheap. But fast-growing software-as-a-service stocks aren’t cheap, and most have continued to rally. BTRS has a path to do the same as long as it keeps its growth intact.
The rally in semiconductor stocks since 2009 has continued over the past year. But there’s been a little bit of a hiccup so far in 2021, which might open an opportunity in Semtech stock.
After racing to an all-time high last month, SMTC has pulled back some 15%. Shares now trade for about 33x forward earnings — no longer a huge multiple in the chip sector.
And Semtech seems to merit a reasonably high valuation. The integrated-circuit chipmaker should benefit from multiple long-term trends, including the Internet of Things (IoT) as well as growth in smartphones and data centers. Semtech sees its addressable market expanding at a 20%-plus annual clip through 2023.
The firm’s broad reach should capitalize on all of those trends; the company operates in multiple end markets ranging from consumer devices to factory automation. The broad case for chip stocks is that more data and more computing power will lead to higher semiconductor demand. That case fits Semtech awfully well.
It bears repeating: value cases in smaller tech stocks can be dangerous. For companies navigating markets with giants, low top-line growth can quickly turn into an irreversible revenue decline. But Zix, a provider of email encryption and other cybersecurity offerings, has managed to carve out a small niche for itself.
Growth has been decent, including a 15% increase through the first three quarters of 2020. Yet competition is stiff, with the likes of Proofpoint (NASDAQ:PFPT) looking to take share.
Zix will have to protect its turf. But it’s done a decent job so far, and ZIXI stock has managed to nearly double over the past five years. With the shares at 14x forward earnings, more upside is ahead as long as that trend continues.
Limelight Networks (LLNW)
Some caution is advised with Limelight Networks. The CDN (content delivery network) provider unquestionably has impressive technology, which underpins streaming video providers like Disney (NYSE:DIS), online gambling sites and myriad other internet businesses.
The long-term problem for LLNW stock, however, is that Limelight hasn’t been able to turn a consistent profit. LLNW stock soared beginning in March as investors bet that the pandemic would drive enormous usage for Limelight customers. That case played out on the top line, with revenue rising 15% year-over-year in the third quarter.
But Limelight still sees full-year profit of, at most, eight cents per share. The midpoint of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) guidance of $28 to $35 million is roughly in line with 2017-2018 results.
That’s not what the market was expecting: The LLNW stock price has been nearly halved from July highs.
The long-term case certainly isn’t broken: multi-year tailwinds still should drive revenue higher. Bottom-line performance simply needs to get better. If it does, there might be another rally in the stock’s future.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.