Small-cap tech stocks — usually defined as technology companies with market capitalizations of no more than $2 billion — can be risky investments. Many of these small companies are pioneering new technologies, but their share prices can be highly volatile, and they risk being outcompeted by larger businesses with stronger balance sheets.
Investing in a basket of small-cap stocks — say five to 10 — is less risky than concentrating your holdings in only a few companies. Some of these emerging technology businesses may be future leaders in their industries and are worth adding to your portfolio today.
Four small-cap tech stocks to watch
New technologies are reshaping the global economy and creating profit opportunities for small businesses and their shareholders. These four small-cap tech companies are worth watching in 2022:
PubMatic (PUBM -0.43%) is a digital advertising technology firm. Its software provides internet publishers with a means to monetize their work by using artificial intelligence (AI) and automation to sell advertising.
PubMatic's publisher clients include a diverse group of businesses, including news organizations, e-commerce companies, video game makers, and streaming TV services. The company derives about half of its revenue from internet content formatted for mobile devices. Mobile represents a growing opportunity for PubMatic, especially outside of the U.S., where PubMatic is only just beginning to add customers. Digital marketing is another secular growth trend that benefits the company.
PubMatic just completed its initial public offering (IPO) at the end of 2020. The company is faring well as the economy gradually reopens and business spending on marketing starts to accelerate again.
Latch (NASDAQ:LTCH) sells hardware and its cloud computing-based software to real estate property developers, enabling them to integrate technology directly into residential development complexes. The company recently expanded its platform to also include commercial office buildings. Latch's software platform provides credential-enabled electronic building access for residents, guests, and service providers (like package delivery services), manages smart home sensors, and increases internet connectivity.
Cloud computing has rapidly proliferated in the past decade, and, as cloud-based companies continue to gain market share, companies like Latch are making successful forays into non-tech industries. Latch is continually adding new capabilities and recently went public via a merger with a special-purpose acquisition company (SPAC).
Latch is seeking to disrupt the legacy industry of property development and management. One-third of the nearly 123 million households in the U.S. pay rent, and more than half of U.S households are organized into multi-family units or apartment complexes. Europe has another 90 million rental units.
As with other rapidly growing companies, Latch currently earns little revenue and projects it will operate at a loss for a few more years. The company is demonstrating how cloud computing and connectivity can transform even the most traditional industries, but shareholders are still obligated to stay focused on the company's potential rather than its current financial results.
As an agriculture company and also a technology firm, AppHarvest (NASDAQ:APPH) wants to make farming sustainable and increase public access to nutritious food. Its indoor farming techniques can grow crops with up to 90% less water, and its flagship facility in Kentucky is one of the largest indoor farms in the U.S.
In April 2021, AppHarvest acquired the AI and robotics company Root AI to expand its capabilities in indoor farming technology. The company is breaking ground on new farms, and, by the end of 2021, expects to have five facilities in operation. By the end of 2025, the company plans to add seven more. AppHarvest's initial focus is on growing tomatoes, but it is also expanding to leafy greens. The company is producing high enough volumes to start supplying the food service industry in addition to local grocers.
AppHarvest's sales are slim and the company is spending heavily to establish new farms. But the company has demonstrated it can produce healthful crops more sustainably, and it is flush with cash after its IPO in early 2021. At the time of this writing, AppHarvest has minimal debt, too. If sustainable food production is something that matters to you, then AppHarvest is worth considering.
Inseego (INSG -1.2%) designs and sells wireless network hardware, and it also provides software for companies to deploy and remotely manage devices connected to their networks. As next-gen 5G technology networks are being built, demand for Inseego antennas and other infrastructure gear is accelerating. And, with remote work becoming normalized during the COVID-19 pandemic, more households are relying on mobile providers for high-speed internet, which is increasing the demand for Inseego's 5G mobile hotspot devices. These 5G devices are proving popular with schools, employers, and consumers alike.
T-Mobile (TMUS -0.46%), which is emerging as a market leader in this new era of digital mobility, offers Inseego's Wi-Fi routers to its customers. The telecommunications giant has the most 5G coverage among mobile service providers in the U.S., and, with 5G still in its nascency, Inseego could ride T-Mobile's coattails as the company continues to expand and improve its 5G network. Inseego is also helping international mobile carriers to construct 5G infrastructure and increase consumer access to the internet, enabling the new age of mobility to continue to unfold.
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Why invest in small-cap tech stocks?
Investing small sums of cash in emerging tech businesses could produce substantial portfolio gains over time. But maintaining portfolio exposure to small-cap companies requires regularly finding new small companies in which to invest since successful small-cap companies eventually become mid-cap or even large-cap companies. Share prices of small-cap stocks can be highly volatile, but small-cap tech stocks can also yield significant returns for patient shareholders.
Nicholas Rossolillo has positions in Latch and PubMatic. The Motley Fool has positions in and recommends Latch and PubMatic. The Motley Fool recommends AppHarvest and T-Mobile US. The Motley Fool has a disclosure policy.