It's no secret that small-cap stocks can offer some of the best returns you'll ever see. Starting small leaves lots of room for massive growth and matching stock returns.
But it's also obvious that you must pick your small caps with a steady hand. Lacking the scale and stability of larger businesses, the promise of huge returns is always balanced against the risk of total failure. And that's especially true in the volatile tech sector.
To help you sort the wheat from the chaff, we asked three Motley Fool contributors to present their best picks among small-cap tech stocks right now. They came up with a colorful variety of choices, from Chinese electric car builder Kandi Technologies (NASDAQ:KNDI) to personal data security expert LifeLock (NYSE:LOCK), with in-flight Wi-Fi service provider GoGo (NASDAQ:GOGO) rounding out the field.
Read on to see how these particular small caps offer more value than risk in the eyes of our analysts.
Joe Tenebruso (LifeLock): In 2014, more than 700 major security breaches exposed the personal information of more than 80 million people. Companies like Target and Home Depot made headlines for cybersecurity breaches that resulted in stolen personal data for millions of their customers. Unfortunately, these companies will not be the last to be hacked, and concerns over identity theft will continue to grow as more of the world's data is stored online.
LifeLock -- a leading provider of identity theft protection services -- offers consumers the tools to arm themselves against this growing threat. The company's services go beyond the typical credit card and personal information monitoring offered by the major credit bureaus. LifeLock monitors its subscribers' credit card applications and changes of address, just like the three credit-monitoring giants do; but it also offers unique monitoring services that include tracking Internet ID theft rings and non-credit alerts. Additionally, if a customer is exposed to identity theft, LifeLock will spend up to $1 million to hire recovery experts to help remedy the situation.
LifeLock is growing its subscriber base at a healthy rate, adding approximately 1.2 million gross new members in 2014, and ending the year with more than 3.6 million members. Impressively, LifeLock's members have also been willing to pay more for upgraded services; monthly average revenue per member increased 7% year over year, to $11.43 in the fourth quarter. And maybe most importantly, LifeLock does an outstanding job of retaining its customers, as evidenced by an annual retention rate that has remained above 87% for the past nine consecutive quarters.
LifeLock also offers identity protection services for businesses. Its acquisition of ID Analytics in 2012 gave LifeLock a beachhead in the enterprise identity risk management arena -- one that LifeLock hopes to expand with products such as its recently launched data breach response plans. This new service will help businesses protect their customers and employees from identity fraud by rapidly activating LifeLock if they suffer a data breach.
With a seemingly never-ending number of computer hacks and security breaches, I expect this service to be popular among companies seeking to mitigate the potential fallout of future information theft incidents. And that should help to further fuel LifeLock's already impressive growth.
Anders Bylund (Gogo): If you're a frequent flyer, you're probably familiar with the "gogoinflight" onboard Wi-Fi network. And chances are, you'll only see more of Gogo and its trademark service in the coming years. Even better, Gogo's stock is acting as if the clear skies ahead are nothing but turbulence and lightning storms. When market values get out of touch with business realities in this way, astute investors can get rich by pouncing on silly discounts.
Gogo already serves 10 of the world's largest airlines. That's 6,000 Gogo-connected aircraft, with FTC approvals for 67 different combinations of airlines and their particular aircraft models. With a combination of land-based and satellite networking solutions, Gogo can keep you connected at 10,000 feet almost anywhere.
Last spring, Gogo shares took a massive haircut as telecom giant AT&T announced its entrance into Gogo's market. The death blow was scheduled for 2015, but never fell -- AT&T has abandoned its in-flight networking plans in order to refocus its assets on expanding its regular wireless operations in Latin America.
Gogo shares didn't recover when AT&T backed down. All told, the stock has lost 20% of its value during the last 52 weeks. Investors are nervous because Gogo isn't making money yet.
But that's just standard operating procedure for a fast-growing small cap. I expect Gogo to keep burning cash for a couple more years, while its target market expands. When it's time to start reaping the profits from years of careful service expansion, you'll be glad that you found out about Gogo when the stock was still cheap. Yes, it's a familiar story for growth investors -- and yes, I fully expect it to play out for Gogo, as well.
Tamara Walsh (Kandi Technologies): If you weren't fortunate enough to buy shares of U.S. based electric-car maker Tesla Motors before its market cap ballooned to more than $25 billion, don't worry. Kandi Technologies, which manufactures and sells electric vehicles in China, the world's largest auto market, offers investors an opportunity to get in on the ground floor of the EV revolution. With a market cap just north of $600 million, the Chinese automaker is still in the early stages of its growth story.
China is an ideal market for electric vehicles because of the suffocating smog conditions there. In fact, the Chinese government is investing tens of billions of dollars in green infrastructure and subsidies for EV makers like Kandi Technologies to help curb the country's serious air pollution problem. Two of Kandi's consumer models, for example, now qualify for local and national subsidies, as well as free license plates in Shanghai, which are typically auctioned at prices north of $11,000 per plate. Moreover, government officials hope to have two million electric vehicles on the road in China by 2020 -- a need that Kandi is well positioned to help fulfill.
Kandi's disruptive business model is also ideal for the Chinese market and growing need for mass market EVs. Similar to the Zipcar model that we are familiar with in the U.S., Kandi operates an EV car-share and lease program that lets people rent its cars hourly from vending-machine-like garages in heavily populated cities throughout China. The company plans to build out hundreds of these EV-rental garages in the years ahead.
There's a good chance that Kandi's car-sharing service will be a success in China. After all, the country now boasts the largest bike-share program in the world, and many of those bikers would likely prefer an enclosed car to better shield them from the smog. Moreover, Kandi Technologies plans to build more than 500 of its EV-rental garages in China during the next four years.
Ultimately, the potential for this type of service in crowded cities, together with Kandi's unique ability to scale its business throughout greater China, makes Kandi Technologies one of the best small-cap stocks to buy today.