Many growth-oriented investors adore tech companies because they can often expand for years by disrupting legacy industries. The sector's biggest success stories -- including Amazon, Microsoft, and Alphabet -- made their long-term investors into millionaires by constantly expanding their ecosystems and crushing their competitors.
Those tech giants could still generate more millionaire-making gains, but investors looking for those types of opportunities should also keep an eye on some smaller companies that are often overshadowed by their larger or flashier peers. I personally believe three of those smaller tech stocks -- Snowflake (SNOW 5.77%), DigitalOcean (DOCN 5.05%), and Wolfspeed (WOLF +0.00%) -- also have the potential to mint new millionaires over the next few decades.
Image source: Getty Images.
1. Snowflake
Snowflake helps companies collect data from a wide range of computing platforms, cleans it all up, and stores it in a centralized data warehouse that can be easily accessed by third-party data-visualization applications. That approach breaks down silos across an organization and makes it easier for managers to make data-driven decisions.
NYSE: SNOW
Key Data Points
Snowflake competes against Amazon, Microsoft, and Alphabet, which all integrate similar data warehouses into their own cloud infrastructure platforms. But Snowflake doesn't operate its own cloud infrastructure, which makes it compatible with a wide range of public cloud platforms, and it charges usage-based fees instead of locking its customers into sticky subscriptions. That flexibility makes it an appealing option for companies that don't want to be tethered to a bigger cloud ecosystem.
That strategy is paying off. From its fiscal 2020 to fiscal 2023 (which ended Jan. 31, 2023), Snowflake's revenue grew at a compound annual growth rate (CAGR) of 98%. It expects its product revenue -- which accounts for most of its top line -- to grow at a CAGR of 32% from $1.9 billion in fiscal 2023 to $10 billion in fiscal 2029.
Trading at 21 times next year's expected sales, Snowflake's stock isn't cheap, but the company's rapid growth, high retention rates, and rising margins could justify that premium valuation and make it a millionaire-maker stock for long-term investors.
2. DigitalOcean
DigitalOcean is a cloud infrastructure services provider like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. But unlike those cloud giants, which mainly serve large enterprise customers, DigitalOcean carves out tiny "droplets" of its servers for use by smaller companies. It also recently opened up its platform for AI applications by acquiring the AI-oriented cloud start-up Paperspace and installing Nvidia's high-end data center graphics processing units (GPUs) in its servers.
NYSE: DOCN
Key Data Points
The bears claimed DigitalOcean would struggle to grow in the shadow of its larger peers, but its revenue grew at a CAGR of 35% from 2020 to 2022 -- and analysts expect its revenue to rise at a CAGR of 15% from 2022 to 2025.
DigitalOcean's revenue growth is gradually cooling off, but its stock looks cheap at just four times next year's sales. Its margins are also expanding, and it's expected to generate its first full-year profit in 2023. Analysts expect its earnings per share (EPS) to grow at a CAGR of 119% from 2023 to 2025, so it could have plenty of room to run before it saturates its niche market. It could also become a compelling takeover target for one of the cloud infrastructure leaders.
3. Wolfspeed
Wolfspeed, the chipmaker previously known as Cree, produces wide-bandgap (WBG) semiconductors made from silicon carbide and gallium nitride, which can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. Those qualities make WBG chips well-suited for use in short-length LEDs, lasers, 5G base stations, and military radars. They're also used to build batteries and powertrains for electric vehicles.
NYSE: WOLF
Key Data Points
The global WBG device market could grow at a CAGR of 29.4% from 2022 to 2031, according to a forecast by Business Research Insights, as WBG chips replace silicon chips across a wide range of industries. To capitalize on that long-term growth, Wolfspeed opened the world's largest 200mm silicon carbide plant in upstate New York in 2022.
Wolfspeed's revenue rose at a CAGR of 32% from 2021 to 2023, but it's expected to decline by 9% in 2024 as the global electric vehicle (EV) market slows down. At the same time, its costs are climbing as it ramps up the expansion of its New York plant. That mix of slowing growth and rising expenses rattled the bulls, but analysts still expect its revenue to increase at a CAGR of 25% from 2023 to 2026 as it bounces back from that cyclical downturn.
Wolfspeed isn't profitable yet, but its stock looks cheap at 4 times next year's sales. Therefore, it might generate millionaire-making gains for long-term investors who stay focused on the growth potential of the WBG market.
