Can These 3 Small Cap Stocks Survive Amazon's Wrath?

It can be tough for companies to compete against Amazon (AMZN -1.14%), the top e-commerce and cloud platform company in the world. Amazon's scale, bundling strategies, and war chest of over $43 billion in cash, cash equivalents, and marketable securities make it a formidable rival for even the world's largest companies.

It can be even tougher for small cap companies, meaning those with a market cap of less than $2 billion, to survive Amazon's wrath. Let's examine three small companies in Amazon's crosshairs, and see whether or not they can keep growing in the tech giant's shadow.

Image source: Getty Images.

Domo

Domo (DOMO -0.51%) provides cloud-based visual analytics tools that can be accessed from mobile apps. Its ecosystem also incudes an app store, an AI platform for crunching data, and collaboration and marketing tools for employees. Amazon bundles a similar service, QuickSight, into Amazon Web Services (AWS). Domo isn't profitable yet, but its losses are narrowing. However, its growth in billings and revenue gradually decelerated over the past year.

YOY = Year-over-year. Source: Domo quarterly reports.

It expects that slowdown to continue in the fourth quarter, with its billings staying flat annually and its revenue rising just 14%-17%. This indicates that bigger competitors like AWS Quicksight, Salesforce's Tableau, and Alphabet's Looker could be pulling away bigger customers.

Domo expects its revenue to rise 21%-22% this year, but analysts only anticipate about 14% growth next year -- which suggests that this small cap cloud player's growth could peak in the near future. Amazon CEO Jeff Bezos notably owns a personal stake in Domo, but it's unclear if that investment will shield it from direct competition with AWS. Domo's stock looks cheap at three times next year's sales, but investors are likely avoiding the stock until its growth accelerates again.

Vonage Holdings

Vonage (VG) is a cloud-based communications service provider. Over the past six years it expanded by acquiring smaller companies like Vocalocity, Telesphere, iCore Networks, SimpleSignal, Nexmo, TokBox, NewVoiceMedia, and Over.ai.

Image source: Getty Images.

Nexmo, a platform that processes text and voice messages for apps, is its core growth engine and competes against Twilio. However, Amazon's SNS (Simple Notification Service) also competes against both services. Despite that competition, Vonage's revenue growth accelerated significantly over the past year.

YOY = Year-over-year. Source: Vonage quarterly reports.

That recovery was driven by the strength of its API business (including Nexmo), which posted 46% annual revenue growth last quarter, and its double-digit revenue growth per business customer -- which both offset the slower growth of its consumer business.

Wall Street expects Vonage's revenue to rise 13% this year and 9% next year. Its earnings are expected to tumble 44% this year due to recent acquisitions, but rebound 6% next year. Vonage trades at less than two times next year's sales, but competition from Twilio, AWS, and other competitors could throttle its near-term growth.

Bandwidth

Bandwidth (BAND 2.27%) is another player in the cloud CPaaS (communications platform as a service) market. Like Twilio and Vonage, Bandwidth handles in-app communications via its cloud-based APIs. However, Bandwidth runs its cloud services on its own nationwide IP voice network -- which gives it tighter control over its operating expenses.

Bandwidth's revenue growth accelerated significantly this year, thanks to its rapid customer growth and higher dollar-based retention rates (which measure its revenue growth per customer).

YOY = Year-over-year. Source: Bandwidth quarterly reports.

Last quarter, Bandwidth's number of active CPaaS customers grew 39% annually to 1,610, and its dollar-based net retention rate hit 116% -- indicating that it's cross-selling more services and locking in customers. By comparison, Twilio posted a dollar-based net expansion rate of 132% last quarter.

Three big companies that compete against AWS -- Google, Microsoft, and RingCentral -- use Bandwidth's APIs. This indicates that Bandwidth could be a popular choice for cloud companies that don't want to feed Amazon's most profitable business.

Bandwidth's profitability has been inconsistent in recent quarters due to rising marketing and R&D expenses, but analysts expect its revenue growth to accelerate with 12% growth this year and 17% growth next year. However, Bandwidth trades at nearly six times next year's sales -- making it pricier than Domo or Vonage.

The key takeaway

Domo, Vonage, and Bandwidth are all still growing in Amazon's shadow. Vonage and Bandwidth are more diversified than Domo, and their broader ecosystems lock in more customers. But investors who are interested in those two stocks should probably consider buying Twilio -- which generates much stronger growth -- instead.

Meanwhile, Domo's analytics business remains too heavily exposed to its bigger competitors. Even if AWS doesn't aim QuickSight directly at Domo, the company needs to fend off other behemoths like Salesforce and Google to stay relevant. Simply put, investors should stick with bigger cloud players instead of taking their chances on these three small cap stocks.