In volatile stock markets, small-cap stocks tend to grossly underperform their large-cap counterparts. While the S&P 500 still is down about 10.6% year-to-date, the Russell 2000, which covers small-cap stocks, remains down by about 23%.

However, small-cap stocks with strong fundamentals should also roar back to life in a market recovery. Investors looking to capitalize on that tendency should buy into companies that have strong underlying businesses, robust fundamentals, and expanding addressable markets that give them the chance to grow revenues at a fast pace.

Large-cap companies often have huge cash reserves to draw from and can more easily ride out a downturn. Smaller companies tend to be more vulnerable. However, because they can more easily deliver high growth rates, strong small-cap companies -- such as tech companies Zuora (NYSE:ZUO), Impinj (NASDAQ:PI), and PagerDuty (NYSE:PD) -- can experience accelerated rebounds as well.

Let's take a closer look at these three stocks and why they might be top small-cap stocks to buy right now.

Business Analysis

Image source: Getty Images.

1. Zuora: An enterprise software company

Zuora provides enterprise-focused cloud-based services that help clients launch and manage subscription businesses. Its flagship products include Zuora Billing and Zuora RevPro.

Zuora Billing helps companies manage and monetize their subscription services. It allows customers to bill their clients in multiple ways. It also enables the user to group customers into batches for different billing and payment operations. Enterprises are able to set payment terms, manage billing relationships, and consolidate invoices.

The Zuora RevPro automates the process of revenue recognition. It allows users to group transactions of goods and services into revenue contracts in line with IFRS revenue standards.

Zuora's biggest clients include Caterpillar, NVIDIA, and FedEx. In its fiscal 2020, which ended Jan. 31, total sales were up $276 million and rose 17.3% year over year. Subscription sales rose 25% year over year to $206.5 million and accounted for 75% of total sales. 

With companies across many sectors in the early stages of an accelerating transition toward subscription-based business models, Zuora is well poised to take advantage. It has been identified as a market leader in subscription management solutions by research firm IDC.

Zuora ended its fiscal fourth quarter with 624 customers that have annual contract values of more than $100,000. That group represents 90% of the company's annual recurring revenue which should help it as it manages the current broader economic downturn.

Its market cap has declined by 31% in 2020 to $1.18 billion. The stock is trading down 23.5% making it a bargain.

2. Impinj: An RFID player

Impinj sells radio frequency identification (RFID) chips that are used to track items, as well as the hardware and software for reading their signals. Many brick-and-mortar retailers use RFID chip technology to track inventories, which helps them gauge customer demand and trends. This connectivity has helped its customer companies move over 30 billion items to date -- everything from apparel to medical supplies to automobile parts. 

Impinj has two primary business segments: endpoint ICs (integrated circuits) and systems. The endpoint IC business is the RFID segment while systems includes tag readers and software.

The company expects the COVID-19 pandemic to weigh on sales in the second quarter. "Looking forward to the second quarter, we see pressure on both endpoint ICs and systems as the impacts of COVID-19 ripple through our customer base," said CEO Chris Diorio during the first-quarter earnings call. "Although we entered the quarter with healthy endpoint IC backlog, we are seeing pushout requests as we and our inlay partners work together to align their inventory with rapidly changing demand."

Impinj has high exposure to the retail space, which buys half the endpoint ICs sold worldwide. Store closures and global shutdowns will drive sales lower in the near term. However, the long-term prospects of the business should keep investors interested.

RFID chips have helped to streamline operations of several retail giants, and those successes have driven further adoption of this technology. Impinj stock has a market cap of $500 million, and its shares are down 18% year to date.

3. PagerDuty: A digital operations management company

PagerDuty is an incidence management platform. Its software-as-a-service (SaaS) platform provides enterprises with functionalities such as reliable notifications and on-call scheduling to help them detect and fix infrastructure issues. It enables developers and other IT employees at a company's operations vertical to resolve business-impacting incidents and ensure robust customer service experience. 

Using PagerDuty's platform, clients can manage events that have an impact on the IT environment of their customers. The customizable notifications are sent via a combination of SMS, phone calls, and emails. 

PagerDuty went public in April 2019 at $24 per share. In its first fiscal year as a public company, it reported adjusted gross margins of 85.5% and ended with $351 million in cash. It works with 60% of the Fortune 100 companies and nine of the Fortune 10. 

It primarily aims to accelerate the digital operations management of enterprises. In fiscal 2020, revenue was up 41% year over year to $116.4 million. It has a customer retention rate of over 90% while average revenue per user grew for the third consecutive quarter.

Companies will continue to spend on digital transformation, especially as the remote-work trend keeps accelerating over the next decade. Enterprises will need to secure their systems and provide virtual access to employees, which will drive demand for digital operations management.

PagerDuty has a market cap of $1.6 billion, and its stock is down 15% year to date.

ZUO PS Ratio (Forward) Chart

ZUO PS Ratio (Forward) data by YCharts

The takeaway

All three of these companies are trading at reasonable valuations: Zuora has a forward price-to-sales ratio of 3.9, Impinj's is 7.8, and PagerDuty's is 3.5.

According to data from Yahoo Finance, analysts expect Zuora to increase sales by 9.2% in its fiscal 2021, and for growth to accelerate to 13.7% in fiscal 2022. Revenue growth for PagerDuty is forecast to be in the 23% range for the next two years. Impinj, meanwhile, is expected to experience a decline of 6.2% in annual sales for 2020, but to rebound with sales growth of 17.6% in 2021.

No one can accurately predict how the coronavirus pandemic will impact a given company's financials. But it is likely to be a near-term headwind for these three small-cap growth stocks, which gives investors an opportunity to buy them at lower valuations.