It doesn't take a large investment to make serious money if you own the right small-cap stock early on. Here's why I'm bullish on Silvergate Capital (SI), Velo3D (VLD -3.45%), and ZipRecruiter (ZIP -6.02%).
1. Silvergate Capital: Market cap $3 billion
Silvergate is a tiny, under-the-radar bank. What makes it notable is that Silvergate was a first-mover in providing banking services to the crypto industry. Many years ago, when crypto exchanges were trading coins 24/7, they had a very specific pain point -- the banking system has limited business hours. Silvergate saw this problem as an opportunity. The bank created the Silvergate Exchange Network (SEN) to facilitate dollar moves around the clock.
As a consequence, most of the major players in the crypto universe now deposit dollars with Silvergate. The bank has almost 1,600 customers, made up of crypto trading exchanges, hedge funds, and institutional clients who want the ability to trade crypto at all hours. In the second quarter, $191 billion in transactions passed through the SEN. Silvergate takes a tiny sliver of fees from these transactions (almost $9 million in Q2).
Overall, the bank had $80 million in revenue in the quarter. Silvergate reported $13.8 billion in deposits in Q2. Most of its money is made via the interest income the bank makes on all its deposits. Silvergate pays nothing in interest, as these are crypto trading accounts. So a rise in interest rates (as we are seeing in 2022) is pure profit for this bank.
Silvergate has also started making loans to clients, using crypto as collateral. This is largely a greenfield opportunity, as the vast majority of banks are crypto newbies. Last year Silvergate was working with Meta Platforms (NASDAQ:META) to issue a stablecoin. When Meta pulled out, Silvergate decided to pursue the coin on its own. While no date has been set for the release, when this coin launches, it could dramatically escalate deposits with the bank.
I'm very bullish on Silvergate. Management has shown a tremendous amount of foresight, which has given this tiny bank a huge leg up in the world of finance. Silvergate is wildly profitable (45% profit margins) and is still growing fast (88% revenue growth in its most recent quarter). And that's in a year when crypto valuations have plummeted.
2. Velo3D: Market cap $675 million
So far, 3D manufacturing has been a disappointment for investors. Many years ago, I made a small investment in 3D Systems (NYSE:DDD), one of the early stocks in this disruptive industry. The investment was a wash-out, and eventually, I bailed.
The idea of 3D printing (also called additive manufacturing, or AM) is very promising. You design a part in your computer, and lasers manufacture the part in aluminum, titanium, or whatever metal you want. You can consolidate manufacturing by creating one complex part, resulting in shorter lead times and lower costs.
While that was the dream, in reality, companies often had to redesign parts in order to facilitate 3D manufacture. Worse, the parts would degrade over time, requiring that supports be added to prevent part failure. So while many companies have been interested in AM, widespread adoption rates have been slow.
A company called Velo3D has made a breakthrough, making this stock a potential dynamo. The company says that its Sapphire machines can reproduce legacy parts without any need for redesign. And there is no performance degradation, so no additional supports are needed.
Velo3D had a major coup when the company landed SpaceX as its first customer. Elon Musk liked the technology so much that he wanted to buy the company. Lucky for us, Velo3D elected to go public instead. The company's currently in high-growth mode, with sales jumping 900% in the most recent quarter. My family made small investments in July.
3. ZipRecruiter: Market cap $2 billion
Right now, sales are spiking high for ZipRecruiter. The company uses artificial intelligence (AI) to help companies find ideal job candidates. Revenues jumped 81% in the first quarter, bringing in $281 million. And yet the market is shockingly pessimistic about this company, giving it a measly multiple of two times sales.
I am very optimistic about ZipRecruiter's growth trajectory. The company charges nothing to job seekers. The bills are paid by the corporations that are doing the hiring. ZipRecruiter finds premiere candidates for open positions. That's one of the best aspects of this business model. By aligning with employers, ZipRecruiter can cement relationships with human resource departments and build out continuous and growing revenues.
In Q1, ZipRecruiter had 150,000 paying employers under its AI umbrella (up 31% from a year ago). It receives 71% of its revenue from flat-rate subscription plans. And 29% are from performance-based pricing plans (cost per click).
When a job opening is posted on the ZipRecruiter site, the AI software (named "Phil") reaches out to the best matches for the job in the network and invites them to apply. Employers can rate the applicants as they come in. As the AI learns what the employer wants, it invites similar candidates to apply for the job. So the AI gets smarter as it gets more data.
Job placement is a huge $205 billion market, just in the U.S., and I think a lot of this business will move online. And ZipRecruiter, with its active marketplace and AI helpbot, is seeing remarkable growth, even in a slowing economy. I think this stock is a good bet to outperform over the next decade. And its cheap stock price of about $20 is an added bonus.