Between entrenched products and incredible resources, there's a lot to like about big tech from an investor's standpoint. However, there's also considerable appeal in companies at earlier growth stages that offer more room for expansion over the long term.
Three Motley Fool contributors have identified smaller players in the tech sector that look poised for strong growth and market-crushing returns. Read on to see why they think that Zuora (ZUO -1.70%), Upwork (UPWK -1.58%), and Intelligent Systems (CCRD -1.22%) are worth buying today.
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Tap into the growth of the subscription economy
Keith Noonan (Zuora): While many software-as-a-service (SaaS) companies have posted stellar returns this year, Zuora's stock performance has been undeniably disappointing. The company's share price is down roughly 28% as coronavirus-related conditions have created obstacles to bringing new customers on board its platform. However, investors willing to look past the current challenges in pursuit of big returns should treat the pullback as on opportunity to build a position in the stock.
Zuora provides a software platform that allows enterprises to easily implement and automate subscription-based payment systems. Building recurring revenue streams will continue to be a core focus for companies across many industries, and Zuora is well positioned to facilitate the continued rise of the subscription economy.
Growth is slow at Zuora right now because economic uncertainty makes businesses less enthusiastic about adopting new software, but the broader transition to subscription-service models is still in early innings, and the company will likely return to more robust performance. Even with current headwinds, the business managed to boost its large customer count by 14% year over year last quarter, and transaction volume conducted across its platform rose 26% to hit $12.7 billion.
Zuora stock trades down roughly 72% from the lifetime high it hit in the summer of 2018, and the company is now valued at about $1.2 billion and four times this year's expected sales. With a depressed valuation and plenty of long-term growth potential still on the table, shares offer a great risk-reward dynamic at current prices.
The freelancer network
Joe Tenebruso (Upwork): Upwork connects freelancers with employers seeking their services. Among platforms that bring together businesses and independent talent, it's the largest in the world. And yet, with a market capitalization of only $3.5 billion, Upwork is one of the smallest stocks I follow. This disconnect shows that, despite its industry leadership, Upwork remains early in its growth cycle -- and plenty of gains still lie ahead for investors who buy shares today.
Upwork's revenue climbed 24% year over year to $96.7 million in its recently completed third quarter. Its gross services volume -- essentially, the total amount of business transacted on Upwork's network -- rose 23%, to $654.5 million. Yet despite this impressive growth, Upwork has only just begun to penetrate the $560 billion global remote work market. Suffice it to say, this growth story is just getting started.
Upwork is not yet profitable, as management is wisely prioritizing expansion rather than near-term profits. Though, importantly, Upwork's profit margins are headed in the right direction; its gross margin improved by two percentage points, to 73%, in the third quarter, and its net loss narrowed to $2.7 million from $3.5 million in the year-ago period.
Moreover, the coronavirus pandemic could accelerate Upwork's growth. COVID-19 is driving more companies to embrace remote workforces, and many are turning to Upwork to help them do so. Thus, investors seeking to protect their wealth from the risks posed by mounting COVID-19 case counts may wish to consider adding Upwork to their portfolios today.
Seek higher intelligence
Will Healy (Intelligent Systems): Consumers worldwide have turned increasingly to cashless payment options. This has spawned investor interest in companies such as Square and Visa.
However, many smaller firms have also benefited. One of these is Intelligent Systems. The financial software company owns CoreCard, which produces software that processes credit card transactions. Intelligent Systems licenses its technology to other companies.
The stock struggled to gain traction for decades, and it traded in penny-stock territory until early 2018. However, thanks to the rise of the fintech industry, it has finally begun to realize its potential. By August 2019, the stock peaked at just over $56 per share. Since that time, it has pulled back and now trades at about $36 per share.
Still, this decline could present an opportunity. Market research firm Valuates estimates a compound annual growth rate for the global fintech industry of almost 24%. This industry growth seems to have translated into gains for the company.
In fiscal 2019, revenue rose by more than 70% from the previous-year levels. Also, diluted earnings per share increased by 74% over the same period.
In the latest quarter, that revenue growth level fell to 19%, and earnings fell slightly amid the pandemic. Nonetheless, the company performed better than expected, and analysts expect a massive rebound. Consensus estimates point to revenue growth of 55% and a 138% increase in earnings for fiscal 2021. Considering that investors can buy this growth at 33 times current earnings, Intelligent Systems could turn into a wise stock pick.
