Established tech companies like Apple and Facebook are generally sound investments, but the law of large numbers can prevent large-cap stocks like these two from delivering multibagger returns at this point in their corporate development.
That generally means that investors seeking bigger long-term gains need to set their sights on small-cap stocks with market capitalization rates below $2 billion. Let's take a look at three promising small-cap players that have room for outsized growth but still trade at reasonable valuations.
1. Impinj
Impinj (PI -2.24%) is a leading manufacturer of radio frequency identification (RFID) chips, readers, and software. Companies use Impinj chips to track products, optimize their supply chains, and collect data.
Image source: Getty Images.
Impinj generated strong sales before the pandemic, especially from brick-and-mortar retailers that needed to track their inventories and sales trends to counter e-commerce giants like Amazon. Its revenue rose 25% to $152.8 million last year, with an adjusted EBITDA of $1.6 million -- compared to a loss of $13.8 million in 2018.
But this year, Impinj's growth stalled as the pandemic disrupted supply chains and shut down retailers worldwide. Its revenue dropped 9% year over year to $102.5 million in the first nine months of 2020, and it posted an adjusted EBITDA loss of $8.4 million -- compared to a profit of $0.6 million a year earlier.
Those numbers look weak, but the company's sales rose 6% sequentially in the third quarter as more businesses reopened. Analysts still expect Impinj's revenue to decline 15% this year as its bottom line remains in the red, but the situation should improve next year as the pandemic passes.
Impinj's stock is reasonably valued at seven times next year's sales, and it could attract a lot more investors as its core customers resume their orders to better track and organize their products for digital platforms.
2. Infinera
Infinera's (INFN 1.84%) optical solutions help carriers boost the speed and capacity of their existing networks without laying down additional fiber. It accomplishes this by splitting the optical signals across different wavelengths.
Image source: Getty Images.
Current-generation fiber networks transfer data at 100G to 200G speeds across long distances and 400G to 600G speeds across shorter distances. Many carriers are now testing out 800G solutions, which mainly come from three companies: Infinera, Ciena (CIEN 0.72%), and Huawei.
Trade blacklists and sanctions are preventing many carriers from buying Huawei's equipment, however, which leaves the market open for Infinera and Ciena. Many carriers don't want to tether themselves to a single supplier, so they'll likely split their 800G contracts between Infinera and Ciena.
Infinera's revenue rose 10% year over year to $1 billion in the first nine months of 2020, and its adjusted net loss narrowed from $113.7 million to $62.5 million. Analysts expect its revenue to rise 4% for the full year, due to slower sales of older products in the fourth quarter, and for its net loss to narrow.
But next year, they expect its revenue to rise 8% as sales of its ICE6 800G products accelerates in the second half of the year, with a full-year profit. That's a solid outlook for a stock that trades at just over one times next year's sales -- and it could attract a lot more investors as its growth accelerates.
3. Limelight Networks
Limelight Networks (EGIO -9.23%) provides a content delivery network (CDN) that delivers digital media content and software from websites and apps. Its notable customers include Disney's Marvel and Fox, Roku, Tencent, and the BBC.
Limelight's revenue rose 3% to $200.6 million last year, but aggressive investments reduced its adjusted EBITDA by 44% to $18.1 million. But this year, Limelight's revenue jumped 24% year over year to $174.8 million as stay-at-home trends during the pandemic boosted the consumption of online content. Its adjusted EBITDA more than tripled to $20.9 million.
Limelight expects its revenue to rise 15%-20% this year and for its adjusted EBITDA to surge 55%-93%. It also expects to post a slim non-GAAP profit this year, compared to a net loss in 2019. Analysts expect its revenue to rise 9% next year, and for its non-GAAP earnings to more than double.
Limelight faces a lot of competition in the CDN space from companies like Akamai and Fastly. But it also has a strong customer base, and its stock is reasonably valued at two times next year's sales and about 60 times next year's adjusted earnings. Limelight's low enterprise value of $550 million also makes it a tempting takeover target for its bigger industry peers.
