Mathematically, it is easier for a high-quality company to produce tenfold returns from a $1 billion market cap than a $100 billion market cap. There are, however, things that a company needs for it to multiply its value 10 times, including a differentiated product, a huge market opportunity, and happy customers.

Both PubMatic (PUBM -0.51%) and Latch (LTCH -5.43%) have these three traits, and with both companies' market caps under $1.5 billion, there is huge potential for them to produce 10-bagger returns (or greater) over the next decade. 

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PubMatic: A different player in advertising

Digital advertising has become the backbone of the digital world, and PubMatic facilitates it. The company represents publishers that are looking for advertisers to buy ad space on their platform. Pubmatic uses its AI-based bidding system to find the best advertiser for its publisher, allowing the publisher to get the best bang for their buck. Its bidding system goes both ways, however, helping advertisers place ads on the best platform for them -- driving up its return on investment. Even though PubMatic focuses on bettering its publishers, its unique AI system helps all parties in the advertising transaction. 

Its AI has led to PubMatic's success in two areas. First, it has attracted strong buy-side partners, including The Trade Desk. Second, it has made PubMatic extremely valuable to its customers, so much so that those who spent $100 in Q2 2020 are now spending over $150 today. More customers have been realizing this, resulting in 88% revenue growth to $50 million in Q2 2021 compared to the year-ago quarter. The company's net income margin grew to 20% in Q2 2021 from 3% in Q2 2020. 

The company -- along with the advertising market at large -- is facing risks from Apple and Alphabet, which have been talking about banning cookies. Cookies give ad-tech companies information on consumers, allowing for more accurate ad placement, so Pubmatic and other ad-tech companies could see lower revenue from less-accurate ad placements. PubMatic has been working around this risk, however. The company has created an Identity Hub Solution, which obtains data on consumers from 13 cookie-less environments.

Despite this strong success and a 2024 total addressable market of $526 billion, the company is valued at just eight times sales -- lower than its closest competitor, Magnite, which trades at 10 times sales. Pubmatic has many things going right: Its customers depend on its product, it is growing fast while profitable, its market is big and growing, and it is worth just $1 billion. All of these factors could contribute to the company seeing vast success over the next decade, and while the trip will be volatile, there could be a chance for the company to see multi-bagger returns. 

Latch: Reimagining security and simplicity in housing

Latch is up to something different than PubMatic, but its customer dependence is equally as high. Latch is trying to make spaces more secure and easier to use by creating a lock that can be controlled, monitored, and accessed from your phone. Latch's real kicker, however, is its software that allows apartment managers to monitor activity and grant and restrict access in a way that's efficient and secure. This visibility that Latch provides has clearly been valuable, allowing real estate owners to increase rents while decreasing operating expenses. No wonder Latch has convinced customers to spend 54% more today than they did one year ago without losing a single customer since 2017.

It is important to know that Latch's customers agree to install Latch before a building is even built -- which can take two years -- and as of today, many of those customers haven't finished building the apartments yet. For this reason, looking at total bookings, which represent written agreements to install Latch after construction, is the key to monitoring success rather than revenue growth. In Latch's Q2, total bookings grew 102% from the year-ago quarter to $96 million, with booked home units growing 108% to over 450,000 units. Latch's Q2 software revenue, which has a gross margin of 90%, grew 119% year over year.

The company's total gross margin is just 9% because Latch loses money on its locks. Because many of its customers don't have a fully constructed building yet, many of them aren't paying for the software. As more of its customers become operational and continue paying for the software, which is a subscription, it will eventually become a larger portion of revenue than hardware. Therefore, while margins and net income aren't pretty today -- in Q2 2021 the company lost $40 million -- the future is extremely bright for Latch. 

Right now, Latch is being installed in three out of every 10 new apartments being built in the U.S., showing its rapid adoption. As the business matures and it sees strong recurring revenue, the company's financial position will likely improve. This company is young, and it has barely scraped the surface of its $90 billion annual total addressable market. At a market capitalization of just $1.3 billion, this top technology company could easily see multi-bagger returns if it can retain customers while continuing its rapid adoption and growth.