If you invest in small companies, you can pretty much expect some price volatility. Sales and earnings are less than predictable, and competition from larger peers can be fierce. If you want your investment in small stocks to be rewarding, you will want to diversify your bets and patiently waits out frequent storms.
Three options to help with that diversity have had a bout of volatility in recent months. That's made shares of PubMatic (PUBM 2.19%), LendingClub (LC -0.12%), and Silvergate Capital (SI 9.76%) look like especially promising investment choices that are trading on the cheap at the moment.
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1. PubMatic: A digital ads software disruptor with incredible margins
With an enterprise value of just $1.2 billion as of this writing, software company PubMatic has tons of potential. It operates in the massive and still steadily expanding digital ads industry. The company helps automate the sale of advertising, mostly for publishers, and is growing fast in connected TV (or CTV, video delivered via the internet).
It was a tumultuous first year for PubMatic's stock after its initial public offering in December 2020. It surged multiple times, only to be humbled again as high-growth but richly valued stocks took a beating throughout 2021. Currently, shares are 65% below their all-time high and back to where they made their debut in public trading -- even though revenue was up 63% through the first nine months of 2021. Management has forecast full-year sales growth of as much as 53% (the fourth-quarter update is due out in February).
That values PubMatic stock at just five times expected 2021 sales. Plus, it's impressive that a company of this size and growing so fast also generates a hefty profit. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $24.3 million in the last quarter (a 42% margin), and a preliminary outlook for 2022 called for another 24% in sales growth with at least a 30% adjusted EBITDA profit margin.
If this small software outfit can pull off the kind of growth figures it's predicting for the year ahead, shares look pretty reasonable right now. Plus, with $137 million in cash and short-term investments and no debt, this tiny player in the digital advertising industry has lots of potential in the years to come as marketers seek out more online promotional campaigns. After the most recent sell-off, PubMatic stock looks like a buy.
2. LendingClub: This fintech has renewed life
After being hit with scandal a few years ago, LendingClub was back in the good graces of investors in 2021. Shares were up 129% for the year, despite a massive sell-off during the final months. With growth stocks still getting beaten down so far in 2022, LendingClub is now more than 52% off its 52-week highs, giving it a market cap of just $2.3 billion.
This looks like an unfair punishment, though. The peer-to-peer lender and bank's revenue grew 20% quarter over quarter in Q3 2021, and full-year 2021 revenue is expected to be as much as $806 million -- up from just $315 million in 2020. Profit margins are rapidly improving as a result. Q3 net income margin was 11%, up from just 4.6% the previous quarter. Shares trade for a meager 9.4 times 2022 earnings estimates.
Granted, consumer loans are highly cyclical. Unsecured personal loans account for LendingClub's surge in revenue this past year, and an increase in defaults on debt payments or a slowdown in consumer spending could put a damper on LendingClub's upside in the year ahead. Ongoing effects from the pandemic cast further unpredictability in financial results.
Nevertheless, after the crash in LendingClub's stock, quite a bit of negativity now looks priced in. With just 3.8 million customers and counting, this small financial technologist could have lots of upside remaining as a new generation of consumers who prefer digital banking, lending, and investing products come of age.
3. Silvergate Capital: Leading crypto bank with lots of momentum
Shares of cryptocurrency bank Silvergate Capital were down following a miss in Wall Street analysts' earnings estimates for the fourth quarter of 2021 ($0.66 per share versus $0.73 expected). It builds on the declines the stock has been suffering in recent months as volatility in crypto prices have weighed on Silvergate. Shares are now off 43% from all-time highs, giving the bank a market cap of just $3.2 billion.
While Silvergate's stock price is closely tied to crypto markets, the real story for the business itself is the Silvergate Exchange Network (SEN). SEN allows institutional crypto investors to send U.S. dollars anywhere in the world, 24/7 -- a vital function since crypto markets never close. Some big names are SEN customers, including Coinbase Global. In Q4, Silvergate said it handled $219 billion in SEN transfers, compared to just $162 billion the quarter prior.
Though it reported an earnings miss in the final months of 2021 (due to lower-than-expected interest income), Silvergate's growth trajectory remains intact. Digital currency customers were up to 1,381 (versus 1,305 in Q3) and average total customer deposits were $13.3 billion (versus $11.2 billion in Q3). As more institutions adopt cryptocurrencies, there's a good chance Silvergate could pick up their business with its exchange network, and in turn claim more deposits on which it can earn more interest income.
Based on 2022 analyst expectations, Silvergate stock now trades for just 18 times expected earnings. That makes Silvergate a value play on the fast-moving crypto industry, albeit one with a volatile stock that will wildly swing as crypto's progress ebbs and flows. However, flush with $208 million in cash, $5.18 billion in interest-bearing deposits, and no debt, this tiny bank could play a pivotal role in the future development of the digital currency industry and all its related technology (blockchain, decentralized finance, etc.). This could be a timely investment in the future of financial services after the most recent tumble in stock price.
