Mid-cap stocks -- defined as those with a market cap between $2 billion and $10 billion -- are companies that have already had some early success growing their business. Many of them are far from finished, though, with the mid-cap distinction a simple milestone on the way to large-cap stock status; many are leading their respective industries in market share dominance. Three such stocks worth a look right now are Arista Networks (ANET 2.33%), Anaplan (PLAN), and Redfin (RDFN 2.48%).
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Gearing up for the next round of cloud growth
With a current market cap of $17 billion, Arista Networks is technically too big for the official (if arbitrary) mid-cap stock definition. But this is still a small firm, especially when compared to the massive $167 billion market cap its large competitor Cisco (CSCO 0.37%) carries.
Arista has been a scrappy growth story over the last decade, providing software-defined and open architecture networking services and hardware to the cloud computing industry. The company rode the proliferation of big public cloud providers like Amazon (AMZN 1.30%) AWS and Microsoft (MSFT 1.65%) higher, but a slowdown in new data center construction from its largest customers over the last year has taken its toll on Arista.
Data by YCharts.
This story is far from over though. Sooner or later, a new wave of networking hardware upgrades will take hold. And in the meantime, the company is embarking on a new journey: the disruption of the private cloud industry, to be replaced with smaller data centers and networks for private use, owned and operated by smaller businesses.
In its first year, the segment hauled in $100 million in revenue. It's a small percentage of Arista's total in the last 12 months, but a promising new area.
Arista also has a solid balance sheet, with zero debt and $2.78 billion in cash and equivalents as of the end of June 2020. Its position of strength has helped it make two acquisitions this year: software-defined networking outfit Big Switch early in 2020, and later the announced takeover of network detection and response firm Awake Security.
The purchases help position Arista for the next round of cloud growth -- in big public data centers, smaller private ones, and in edge computing and localized hubs. Patience will be required here, but at just 19.5 times trailing 12-month free cash flow (revenue less cash operating and capital expenses), this stock looks like a real value for a company that will continue to grow over the long term.
A wave of new planning needed
Anaplan's second year as a publicly traded company has been rough. The cloud-native software firm has reported far slower growth this year than originally anticipated, and while many cloud computing stocks have skyrocketed to new all-time highs this year during the pandemic, Anaplan is still trading just shy of its all-time highs, notched right before the March economic lockdown.
But things are starting to look up for the company once again. Corporate budgets are loosening up again as businesses figure out how to navigate the "new normal," and Anaplan could be a big winner in the years ahead. Management has indicated new deals it was working on with potential customers have started moving again, and the trend could continue. Enterprise resource planning (ERP) software should be in high demand in a world post-COVID-19, and Anaplan, in particular, could have an edge with its cloud-based and remote work-enabled offering, which stitches together all of an organization's data to help teams make informed decisions.
Plus, full-year expected growth of 26% isn't too shabby, especially considering the current climate in the business world. New integrations with public cloud providers like Alphabet's (GOOGL 1.27%) (GOOG 1.25%) Google Cloud and fresh planning tools available on its platform should keep the upward momentum rolling. $305 million in cash and equivalents and zero debt also help, making this a well-funded software growth story as it sacrifices profit for maximum expansion. Negative free cash flow of $18.8 million through the first half of 2020 won't sit well with all investors, but Anaplan is at no risk of running out of money anytime soon.
Given it generates red on the bottom line, Anaplan can be tricky to stick a fair value on. But with a market cap of $8.5 billion, and valuing the stock at 19.5 times expected revenue for this year, shares look like an attractive long-term purchase to me if the company can maintain its recent pace.
The future of real estate is... virtual?
Unlike the first two picks, Redfin has been off to the races this year, and is sporting an 86% return year-to-date as of this writing. Even after the run higher, though, Redfin has a market cap of just $4.7 billion, and could have plenty of room to grow even more in the years ahead.
Redfin's share of residential real estate transactions accounted for just 0.93% of U.S. home value sold in Q2. The real estate industry -- even the digitally enhanced broker variety that Redfin specializes in -- favors many players, so I don't expect Redfin's market share to ever be a majority of U.S. home value sold. But Redfin still accounts for a tiny slice of the pie. And with younger Americans starting to relocate en masse from the largest and most expensive cities to smaller and more affordable areas, Redfin's business could be a big beneficiary of a new digital era.
Among other factors, this trend is responsible for Redfin's 31% increase in revenue through the first half of 2020. New business lines like cash offers to home sellers made directly by Redfin, along with other technology tools, mean this digital real estate broker still doesn't consistently operate in the black. But things will improve if the company can reach a larger scale. In fact, free cash flow reached break-even in the first six months of the year. As this is a grow-now firm, I wouldn't be surprised to see free cash flow reverse course at some point, but it's nonetheless a big improvement from the negative $153 million free cash flow the company burned through in the first half of 2019.
Free cash flow positive or not, Redfin is all set to continue expanding its disruptive residential property buying and selling operation. At the end of June, the company had $453 million in cash and equivalents and $123 million in convertible debt. After the end of Q2, the company raised another $575 million in cash with another round of convertible debt. Trading for 5.6 times current projections for this year's sales and flush with liquidity, I like this digital broker's chances at consolidating more real estate market share to itself.
