Small-caps and technology have stolen the spotlight in the first half of 2018, but where should we turn our attention for the next leg of the tech rally?
While I'm sure FAANG names -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- will see their share of attention, the truly big upside is likely going to be found in the combination of what has worked lately: smaller cap tech. Well, mostly smaller cap tech.
Here are five names I'm watching for the second half of the year.
Coupa Software's platform manages $680 billion of spending across its clients. Coupa claims to have helped businesses save $23 billion already. Given the total addressable market for online spending continues to accelerate, this may be the perfect place to be positioned in the cloud.
Shares are a tough chase today with the stock trading near $60 after earnings.
The company saw revenue surge 37% to $56.4 million in its latest results, but my focus with COUP is like my focus on other cloud names, subscription revenue. Coupa's subscription revenue increased 40% to $50 million. Although the company is still losing money, free-cash-flow of $11.5 million along with strong subscription growth should keep interest high.
You can't get sales without marketing and that's where SendGrid comes into play. This cloud-based email services platform uses algorithms to help target ads, get people to take action, and get emails thru spam filters. In short, when you ask yourself how you continue to receive junk mail and sales pitches in your email inbox despite filters, you can thank SendGrid. Of course, thanking them probably isn't what you had in mind, but companies need marketing campaigns and email continues to be a fantastic way to reach an ever increasing number of people.
SEND delivered 130.4 billion emails last quarter. Let that sink in. And this number grew by 29%. The law of large numbers doesn't apply to emails in the same manner as revenue. Speaking of which, revenues grew 31% recently, hitting $32.6 million as SEND's customer base grew 35% to 69,000. Financial projections maintain the same 30%+ growth. Keep an eye on the number of emails sent. As long as those numbers remain strong, it should push revenues. This is a name I believe traders can buy right here.
The last cloud name I would consider here is Zuora, another recent issue. The company offers the Zuora Central Platform that acts as an intelligent subscription managements hub which automates the subscription order-to-cash process. Revenues skyrocketed 60% to $51.7 million last quarter with subscription revenues higher by 39% at $36.1 million. What attracts me most here is the 112% dollar-based retention, which roughly translates to subscribers spending 12% more in the second year than the first year. This type of internal (same-sales) growth is a key focus for me in cloud based names.
I'm going to jump off the small-cap tech track for a moment and pull a non-tech name into the mix. Not just a non-tech name, but a REIT: Innovative Industrial Properties (IIPR) . Normally, REITs aren't a name associated with huge upside potential, but they can be when they are associated with what might be the biggest sector over the next few years. I'm talking about marijuana.
IIPR acquires medical marijuana greenhouses in the United States and leases them out for 15-year periods. These long leases create predictable cash flow and payouts for shareholders. The company owns a half-dozen cannabis farms across five states and produced $2.68 million in revenue already with $0.23 funds from operations. Strong performance for a company only having reported five quarters of financials.
Medical marijuana is legal in 29 states while recreational use is now permitted in 9 states. Of course, the Federal view is an overhang, but there is nothing being enforced at the moment, and it does not appear to be a real threat over the next few years. IIPR is capital intensive, so the company will be raising capital to fund additional properties. I would look to dips in the stock price on secondaries as a time to buy.
Last up is a group of five names that could all fill the final spot, but all of which have run a bit too far for my current liking. In short, I would consider any of these five to fill the last spot should they pull back 15-20%. We'll call them honorable mentions or portfolio names in waiting. They include:
If you must have a fifth name now, then I'd grab Stitch Fix (SFIX) . The stock has come under the weight of its own success. Insiders have had access to sell after a few recent lock up expirations, and given the early strength of the stock I think we've seen that, along with a large short interest, hold down the price.
The company labels itself as an online personal styling service that combines data science and human judgement to deliver one-to-one personalization. In short, the company acts as a personalized shopper. They have users provide more than 85 different data points, including size, price point and even how often they dress up. From this information, the company ships personalized selections of apparel, shoes and accessories. Users pay only for what they keep, and they return any unwanted items at no charge.
Stitch Fix recently launched their Men's and Plus categories which weighed on the stock because these segments tend to see smaller less profitable purchases. I view this as an opportunity, since margins/profitability will expand as this segment of the business grows. The company is simply expanding to capture more of the $353 billion apparel, footwear and accessories market. This should grow to nearly $425 billion by 2021. I think we could easily see a return to the mid $20's post earnings.