Investing in small-cap stocks can come with some incredible upside. These are stocks that don't trade at high valuations, which means that if they're successful there can be a lot of room for their valuations to rise higher in the future. On the flip side, however, they are often riskier options than larger, more established businesses.
A couple of small-cap stocks that have the potential to achieve significant gains next year are InMode (INMD 0.70%) and Bitfarms (BITF -2.24%). Here's why these two small-cap stocks could be attractive investments to buy today.
1. InMode
InMode's stock is down 30% this year and its market cap is at around $2.1 billion. The medical device company's forward price-to-earnings ratio is a modest 9. That low P/E suggests it's a potential bargain, especially for a business that has some promising growth prospects.
InMode specializes in the manufacture and marketing of minimally invasive and non-invasive procedures for body contouring, skin treatment, and various medical aesthetic applications. Some of the company's devices help contour skin, and that can be in high demand, especially as many weight-loss products have been rising in popularity in recent years. As people lose weight, they'll have an incentive to get rid of that excess skin. InMode's treatments offer attractive alternatives when compared to more invasive plastic surgery. The problem at the moment is that demand isn't taking off just yet because of consumer uncertainty about the economy.
If the outlook for the global economy improves in 2024, that could drive up the price of InMode's stock, as forward-thinking investors bet on the opportunities here. The company expects revenue to come in between $500 million and $510 million in 2023, which (at the midpoint) would represent an 11% increase from 2022. This is in what should be a slow year for the business. You can expect InMode to achieve stronger growth rates.
Analyst price targets suggest the healthcare stock could rise by more than 60% over the next 12-18 months. But if you're willing to hang on for longer, even better returns are possible. InMode's modest valuation and strong business model make it an undervalued buy heading into next year.
2. Bitfarms
Bitfarms is a much smaller company, with a valuation of $550 million. And that's with 2023 being a phenomenal year for the crypto operation, as its share price is up a staggering 290%.
The Canada-based crypto mining company benefited in 2023 from renewed interest in Bitcoin. The digital currency rose in popularity again as people became concerned with the economy. There's also the hope that a spot Bitcoin exchange-traded fund (ETF) may soon gain regulatory approval, which could lead to more demand for digital currencies.
Not only will an increase in the price of Bitcoin help Bitfarms fetch a higher price for its output, but the mining company is also working on increasing its efficiency. It estimates that by the second half of next year, its rate of exahashes per second could rise to as high as 21, up from 6.3 right now. This is what is also known as the company's hash rate, and it's an important key performance metric for crypto mining companies.
Profitability is a big concern around the business, and in the quarter ending Sept. 30, Bitfarms incurred an operating loss of $18.6 million. That loss is an improvement on the $97.8 million operating loss it incurred during the same period in 2022.
Bitfarms could be a risky option for investors given its exposure to crypto, which is highly volatile. But for investors who are comfortable with the risk and who want a way to benefit from the growing popularity of digital currencies, this could be an attractive investment to hang on to next year, as it could have a lot of upside.
