Large companies with proven track records of success tend to be popular with investors because they offer predictability and security, whereas small companies with valuations in the range of $1 billion can be more speculative in nature. With the Nasdaq-100 technology index currently trading in bear market territory, those smaller companies have been hit particularly hard by the broader sell-off as investors have trimmed their risk exposure.
In some cases, this presents an opportunity for those with a long-term investment horizon. While these smaller tech stocks carry outsized risks, they can also offer significant growth potential. Here are two beaten-down small-cap companies that could transform your portfolio -- if they can successfully execute on their business strategies.
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1. GoPro
GoPro (GPRO 0.29%) is the leader in action camera technology. It's not new to the public markets, having listed in 2014, but since hitting an all-time high stock price of $93.85 not long after its IPO, GoPro stock has steadily declined by 92% to under $7 per share. The company's primary business model of selling camera hardware was an admittedly one-dimensional plan, and it led to a revenue plateau with very little growth.
But GoPro has begun to turn things around. It has unlocked new revenue streams through two subscription offerings with more on the way, and it has increased its product profit margins by selling cameras directly to the consumer rather than relying solely on large retailers. Revenue bottomed out in 2020 amid the worst of the pandemic, and it's steadily climbing again, with analysts expecting it to cross $1.2 billion in 2022 for the first time since 2015.
Earnings per share is now also at the highest level since the company went public in 2014, so although revenue has been relatively flat, GoPro has succeeded in making the business more profitable beneath the surface.
Subscription revenue, for example, carries a gross profit margin of up to 80%, which is close to double GoPro's overall blended gross margin of 41.8%. Over 1.7 million GoPro.com subscribers now pay $49.99 per year to unlock exclusive product discounts, cloud storage, and live stream capabilities. That subscriber figure has grown 85% over the last 12 months, and revenue generated from subscriptions now represents 9% of total revenue. While that's still a small percentage, the growth rate suggests subscriptions will play a very important role in GoPro's business in the future.
GoPro stock trades at a price-to-earnings multiple of just 7.6 based on its 2021 earnings per share. That's a 70% discount to the Nasdaq-100 index, which trades at a multiple of 25. It implies GoPro stock will need to more than triple in price just to trade in line with the broader tech sector. Analysts at Wall Street investment bank JPMorgan Chase are certainly bullish, betting it could soar to at least $15 a share from here.
Image source: Getty Images.
2. Skillz
The mobile gaming industry is red-hot. Thanks to smartphones, popular games now sit in our pockets and travel with us wherever we go, so it's no surprise that the mobile category made up over 50% of the gaming industry's $180 billion value in 2021. In fact, it was the only segment that generated growth, with console and PC categories having a slightly down year.
Skillz (SKLZ -0.16%) is an innovative platform technology company that provides a new way for game developers to monetize their creations. While mobile games are incredibly popular, financial success is achieved by just 2% of development studios, which leaves the other 98% out in the cold. Those developers can add their games to the Skillz platform, where players can participate in paid tournaments to win cash prizes, with a portion of the entry fees split between the game creator and Skillz.
Skillz is in the process of delivering a next-level experience to its 30 million players. It's hosting a developer competition to create a new football game in partnership with the National Football League, which is currently in the final stages. It also just signed a deal with the Ultimate Fighting Championship (UFC) which allows some developers to create new games using the brand and the likeness of famous fighters. These are positive steps toward adding more mainstream content to the Skillz platform, which has historically been composed of generic titles.
After being caught up in the meme-stock frenzy of early 2021, Skillz stock has struggled, falling 95% from its all-time high near $44 a share. The tech sell-off has added more pressure on the stock because investors have been discarding companies that aren't generating profits. Skillz reported a net loss of $181 million in 2021, and it could exceed that in 2022 given its net loss of $148 million in the first quarter alone. But the company is aggressively trimming its marketing spend, which is its largest single cost, to help improve its bottom-line results.
Still, there are many positives to the Skillz story. It's on track to grow its revenue from $119 million in 2019 to $400 million in 2022, a compound annual growth rate (CAGR) of 49%. It's having a positive effect for over 30,000 game developers, with over $100 million in prizes paid out to their players every month. Plus, the e-sports industry could be worth over $2.2 billion in 2022 according to some estimates, which could more than triple to $6.8 billion annually by 2027.
That's a promising addressable opportunity for Skillz, especially since it's operating in mobile, which is arguably the highest-growth segment if overall gaming industry value is anything to go by. If the company can manage its net losses, it could see strong share price growth in the long run.
