SPECIAL REPORT The Top 7 Stocks for 2024

Stocks to Watch: 3 Smaller Tech Players Ready for a Breakout

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  • With viable, long-term prospects, these stocks are positioned to ride the AI wave in a supporting role.
  • Onto Innovation (ONTO): This manufacturer closed a series of deals totaling $100 million to support semiconductor inspection and compliance. 
  • Fabrinet (FN): Fabrinet’s suite of blue-chip clients includes Nvidia and Cisco, cementing its position across the tech stock spectrum.
  • Extreme Networks (EXTR): Our interconnected work demands network infrastructure, and Extreme Networks is a hidden gem ready to grow with the market.
  • These small tech picks ensure sustainability no matter who wins the artificial intelligence arms race. 
smaller tech stocks - Stocks to Watch: 3 Smaller Tech Players Ready for a Breakout

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All of today’s top tech stocks have one thing in common.

They began as unprofitable, small-cap firms before exploding into the mega-cap monoliths of today. True, many tech stocks didn’t survive the post-Dot Com purge. Yes, today’s top tech stocks enjoyed an unprecedented bull run driven by low rates and continual monetary policy tweaking. 

However, today’s hidden tech stocks have an advantage. They exist in a market primed to search for the next 10x tech giant. Likewise, the operational ecosystem is more mature overall and supportive of smaller public startups and small- and mid-caps. Of course, investors often get burned chasing the “next sure thing”, mainly when the company is riding a wave of irrational exuberance or meme stock status. 

It’s tough to sort the signal from the noise regarding tech stocks today. The AI craze makes it harder as every company slaps AI labels across its products to capitalize on emerging trends. To that end, three smaller tech stocks are ready to breakout with underlying fundamental strength and strong long-term prospects. 

Onto Innovation (ONTO)

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Onto Innovation (NYSE:ONTO) is an American hardware and software company offering a range of solutions to semiconductor manufacturers.

That alone should pique your interest. The company’s products are critical components supporting the swelling semiconductor demand that pushed Nvidia (NASDAQ:NVDA) and peers sky-high this year.  

ONTO’s reporting shows the tech stock’s potential, as they boast a 20% combined annual growth rate (CAGR) since 2019 and 5x earnings over the same period. Yet, that’s only part of the story, and it conceals the massive prospects Onto has in the face of emerging AI trends. 

Last month, Onto Innovation announced a massive order package totaling $100 million for its Dragonfly G3 inspection system. The inspection system serves to detect tiny, sub-micron defects in chips. Ensuring compliance with tight standards is critical to the semiconductor industry, as even minor manufacturing defects can render millions of dollars worth of products unusable. 

Notably, ONTO reports the increased order rate is coming on the heels of increased demand for AI-supporting GPU and tech stacks. Last year, the global GPU market value ranged around $2.4 billion. However, analysts expect the industry to hit a near 35% CAGR and reach $25.5 billion net value by 2030. Clearly, we’re in a new era as companies race to bring AI to market. Clearly, Onto Innovation’s solutions are a vital component of that growth plan.  

Fabrinet (FN)

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Fabrinet (NYSE:FN) manufactures standardized electronic and technical parts for companies that, in turn, construct the end item. It’s similar to the way car manufacturers outsource door production, for example, before compiling the final product in their facility.

In Fabrinet’s case, though, it is manufacturing optical communication components and high-tech lasers for companies like Cisco (NASDAQ:CSCO), their largest customer by revenue.

Beyond its core blue-chip consumer base, institutional investors see AI opportunity and upside for this tech stock. After a solid earnings report, analysts raised the consensus price target to $165 on the strength of Fabrinet’s AI prospects. Specifically, analysts see Fabrinet’s integration with data communications companies surging on AI as a bullish indicator.

During the quarter we saw very strong growth in datacom revenue, driven by new AI products,” said Fabrinet’s CEO Seamus Grady. In affirming the outlook, he said he is “optimistic that new datacom programs can continue to offset inventory absorption in the industry, and that we can extend our track record of strong execution.”

Notably, Nvidia comprises 13% of Fabrinet’s revenue, and other AI-centric data communications companies are flocking to the stock. Like Onto Innovation, Fabrinet’s components are critical to the growth and expansion of AI markets. Similarly, Fabrinet’s success is agnostic to whichever end companies emerge the winner in today’s AI race. Both companies stand to benefit from the trend overall, no matter which companies survive the competition and which don’t.

Extreme Networks (EXTR)

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Extreme Networks (NASDAQ:EXTR) is a U.S.-based networking company that manufactures wired and wireless network equipment.

Simultaneously, the company develops software solutions for a spectrum of security, network management, and analytics needs. Unsurprisingly, in today’s interconnected world, the enterprise-level network infrastructure market is projected to grow to $86 billion by 2030, a 5% CAGR. Hence, Extreme Networks is uniquely positioned to capitalize on that growth. 

In early August, the company reported earnings that bode well for its prospects. The earnings stand strong but are noteworthy considering the overall economic downturn and tech stock turbulence. Extreme Networks posted 31% year-over-year (YOY) revenue growth for fiscal year 2023, with Q4 revenue alone up 18% from the previous year. Most impressively, EXTR doubled industry analyst estimates across the board, indicating plenty of hidden upside for the networking firm. 

The company is uniquely positioned to capitalize on the growing AI trend. Specifically, it leverages proprietary AIOps concepts to optimize network operations and deliver better results more quickly to clients. As data demand rises on the AI winds, Extreme Networks’ product suite will only expand alongside it. 

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines


Article printed from InvestorPlace Media, https://investorplace.com/2023/09/stocks-to-watch-3-smaller-tech-players-ready-for-a-breakout/.

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