Small-cap tech companies have provided some of the most incredible stock gains in recent history, generating huge wins for investors who got in on the ground floor. On the other hand, small-cap stocks can be prone to big volatility and risk, and tech companies under this banner tend to be even riskier due to the heightened financial and infrastructure advantages that large companies have in the sector. This dynamic encourages a careful eye and steady hand when selecting for your portfolio.
To help put you on the trail of three small-cap tech stocks that could be worthy of your investment dollars, we asked three Motely Fool contributors with keen understandings of the technology sector to spotlight a promising small-cap tech company. Read on to learn why TubeMogul (NASDAQ:TUBE), Sierra Wireless (NASDAQ:SWIR), and Cascade Microtech (NASDAQ:CSCD) made the list.
Tim Beyers (TubeMogul): Admit it: You don't know TubeMogul. It's OK. I get it. At under $400 million in market cap, this relatively new public company isn't on the radar of many investors. That won't be true three years from now.
Founders Brett Wilson and John Hughes envision TubeMogul doing for video advertising what Google AdWords has done for search advertising. Programmatic buying is the key: TubeMogul matches ad agencies and brand stewards with hundreds of online destinations and local TV networks. Shoppers designate who they want to reach and how much they want to spend and then let the platform figure out placement.
If that sounds like a massive undertaking, it is. Technology from over 30 different providers is embedded in TubeMogul's single interface. As a result, clients can run campaigns in 70 different countries. Scaling up from there will take time, but the opportunity is huge. Right now, 91% of TubeMogul-delivered ads are rendered on a desktop computer. As the market shifts, TV and mobile ads will become a greater part of the mix, increasing volume and pushing TubeMogul revenue, profits, and cash flow to new highs.
You could also look at this stock story from a macro perspective. Worldwide, online video is a small portion of the overall broadcast advertising market yet still reached $10.9 billion in 2014. Researcher Zenith OptiMedia forecasts 29% annualized growth from now through 2017, at which point the market will be responsible for $23.3 billion worldwide.
By contrast, TubeMogul generated just $114.2 million revenue last year, S&P Capital IQ reports. Occupying a leading position in programmatic video ad distribution should multiply that figure many times over and supply equally generous returns to investors.
Andres Cardenal (Sierra Wireless): Sierra Wireless is a pure play on machine-to-machine (M2M) communications, a remarkably exciting industry offering enormous potential for growth over the long term. Investors are getting disappointed with the company's financial performance lately, and Sierra Wireless stock is down by more than 50% from its highs of the last 12 months. In this context, temporary weakness could be creating an attractive opportunity for investors to buy a disruptive growth company in times of generalized negativity.
Devices around the world, whether it's a smartphone, a home appliance, a car, or a security camera, among countless other possibilities, are becoming increasingly interconnected via Wi-Fi and similar technologies. With an estimated market share around 35%, Sierra Wireless is an industry leader when it comes to the hardware and software making these connections possible.
This means Sierra Wireless offers enormous potential for growth, ABI Research estimates the number of connected devices will grow from 1.4 billion in 2012 to 12 billion by 2020. According to data from Cisco, the market opportunity in M2M communications will be worth around $14.4 trillion from 2013 to 2022 in terms of increased revenues and lower costs.
Sierra Wireless delivered a year-over-year increase in revenue of 17% during the last quarter, reaching $158 million. Adjusted diluted earnings per share jumped from $0.08 in the second quarter of 2014 to $0.26. While investors are expecting more growth from the company, the key variables are still moving in the right direction at a nice speed.
Keith Noonan (Cascade Microtech): Cascade Microtech probably won't win any points for name recognition, but don't let its obscurity relative to the titans of the chip industry put you off. The company provides a needed product in the semiconductor sector, and it looks to be in position to benefit from tech trends.
Cascade Microtech has a market cap around $226 million and makes probes that test semiconductor wafers to ensure that they're functional and ready to ship. The company has a base of over 800 customers, and counts each of the world's 20 largest chipmakers in that fold, a list that includes Intel, Micron Technology, and Samsung, among others. With an increasing number of devices depending on semiconductors for functionality and the progression of Internet of Things connectivity, Cascade has the potential for substantial and sustained growth.
The company's second-quarter report saw it grow sales roughly 9% year-over-year and roughly 14% sequentially, with the company also delivering record gross margin at 55.6%. Sales of probe cards for radio frequency chips that enable wireless and broadband communications were key to driving growth in the quarter, and RF chips are likely to see increased demand as the Internet of Things ecosystem develops. Cascade Microtech might also benefit from chip scaling, as smaller nodes tend to be more prone to failure.
Valuation-wise, the company looks like a good play. Its forward price-to-sales ratio sits at just 1.57, while its forward price-to-earnings ratio of roughly 18 is in line with forward P/E estimate for the S&P 500 and below the average for its subsector of the semiconductor industry. It also has roughly $46 million in cash and marketable securities and no debt.
A valuation that leaves room for growth and a compelling position in the chip industry make Cascade Microtech an attractive option in small-cap tech stocks.
Andrés Cardenal owns shares of Google (A shares) and Google (C shares). Keith Noonan has no position in any stocks mentioned. Tim Beyers owns shares of Google (A shares) and Google (C shares). The Motley Fool recommends Cisco Systems, Google (A shares), Google (C shares), Intel, Sierra Wireless, and TubeMogul. The Motley Fool owns shares of Google (A shares), Google (C shares), Intel, Microsoft, and TubeMogul. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.