The U.S. economy is still reeling from COVID-19. Following a deep 30%-plus plunge in March, the stock market has rallied all the way back to where it started 2020. It appears to be woefully disconnected from reality. Now couldn't possibly be the time to invest in small-cap businesses, right?
Contrary to what our gut often tells us, history says the time to invest in small-cap stocks (usually defined as any business with a market cap of less than $2 billion) is during periods of peak uncertainty. For investors looking to invest in fast-growing and disruptive companies for the long term (at least a few years or more), the timing need not be perfect. The three that top my list for the month of August are REPAY Holdings (NASDAQ:RPAY), Ontrak (NASDAQ:OTRK), and Limelight Networks (NASDAQ:LLNW).
Digital payments outside the e-commerce world
E-commerce and digital payment methods are rising thanks to a massive migration to the internet. But while digital payments represent a big growth opportunity in the next decade, consumers use a card for about two-thirds of transactions each year.
Card use is a completely different story for business-to-business (B2B) and loan repayments -- massive markets that encompass more than $2.3 trillion a year in transaction volume. According to REPAY, which focuses on these markets, B2B and loan repayment transactions use cards less than half the time. Banks, credit unions, and big business exchanges aren't willing to pay a fee associated with digital payments (versus "free" cash and check processing). But in a world adjusting to social distancing and rising remote work, legacy ways of accepting and making payments are set to change.
REPAY is a tiny firm, processing card volumes of just $3.8 billion (up 58% from a year ago) for revenue of $39.5 million (up 71%) in the first quarter. During that period, the biggest risks for this software and payments technologist were high debt and a relatively small cash balance. But the issuance of new stock in May -- raising $76 million -- and warrant redemptions have lowered the company's net leverage to 1.25 (net debt divided by EBITDA -- earnings before interest, tax, depreciation, and amortization).
The strengthened balance sheet also includes a recent $8 million payment for the acquisition of small start-up cPayPlus announced in July. The acquisition strengthens REPAY's presence in the B2B world with a base of new customers and software partners that integrate the payment technology into money management systems. The company has an active merger and acquisition pipeline to keep up its fast growth rate, so the infusion of fresh cash is a big positive for REPAY. This company has huge potential as it converts more legacy cash payments into digital ones in the years ahead.
Healthcare is going virtual
Shares of virtual healthcare and coaching outfit Livongo Health (NASDAQ:LVGO) have skyrocketed over 400% so far this year, but it's not alone. Its peer Ontrak, which recently changed its name from Catasys, has also more than doubled as of this writing.
Ontrak has provided an outlook for some 156% growth in revenue this year. This virtual mental health and chronic condition care provider is growing its addressable base as it expands into new states and partners with new health plans. And amid the pandemic, new enrollees are soaring. Users of Ontrak jumped to 10,176 at the end of the first quarter, up from 6,996 at the end of 2019. A further 1,339 users joined in April.
Livongo is still a pretty small platform with a market cap of just $12 billion, but Ontrak stands out as a particularly tiny peer in the burgeoning digital-based and data-driven healthcare space. With a market cap of just $650 million, much is riding on Ontrak being able to maintain its growth pace. Though it has access to more liquidity, cash on hand at the end of the first quarter totaled just $12 million and debt $33 million.
Ontrak is clearly the underdog here, but Livongo's outperformance in no way diminishes Ontrak's potential. Healthcare is a massive industry worth trillions a year. New use cases for remote care are actively being developed, and the company's platform is picking up momentum. Trading at only 7.2 times expected 2020 revenue compared to Livongo's nosebleed 42.0, I like the risk-to-reward possibility for fast-expanding Ontrak.
Internet video is the future
CDNs are modern-day infrastructure companies, entrusted with the safe delivery of data and content across the web. Limelight has been growing as its TV streaming partners, including Disney+, Peacock, and HBO Max debut. Second-quarter revenue increased 28% from a year ago -- a more than respectable rate that was nonetheless lower than the 32% increase seen at the start of 2020. Blame the pandemic and lower activity in live events like sports.
But Limelight is still trending positive. It expects full-year 2020 revenue to grow 17% at the midpoint of its guidance and adjusted EBITDA to rise 74%. The small CDN also just announced that it raised $110 million in fresh cash by selling convertible debt to continue its global expansion. It's getting ready to move into the new edge computing industry, where data gets pushed out of the cloud and closer to devices making the request for information.
Even after a pretty good run, this small stock has a market capitalization of just $765 million and trades for three times 2020 revenue guidance. After a solid second-quarter report, I'll be adding to my position in this infrastructure and internet-based TV outfit.