While some popular growth stocks have bounced sharply from their June lows and once more sport rich valuations, it's still not hard to find fast-growing, small-cap, tech companies with unique products or services that look very reasonably priced.
Here are three small-caps that I think fit this description. As always, investors are advised to do their own research before taking positions in any of the companies mentioned. Also, it's worth keeping in mind that small-cap growth stocks are often both more volatile and more illiquid than their larger counterparts.
1. Valens Semiconductor (VLN)
Market Cap: $431 million
Valuation: Valens has an enterprise value (EV - market cap minus net cash) equal to 3.1 times a 2022 revenue consensus estimate of $116 million and 2.4 times a 2023 revenue consensus of $188 million. These multiples are below those sported by many other chip developers with similar gross-margin (GM) profiles.
The Elevator Pitch: Valens is an Israeli developer of high-speed video connectivity chips for commercial audio/video (AV) equipment and cars. The physical layer (PHY) features of its chips are a competitive strength in areas such as reliability, latency and power consumption. For now, the lion's share of Valens' revenue comes from the commercial AV market, where it has design wins with OEMs such as Logitech (LOGI) , Samsung and Sony (SONY) for videoconferencing gear, industrial/medical equipment and commercial signs, and where it benefits from remote work/learning trends. But over the long run, the auto market, where Valens' chips provide connectivity for high-res cameras and other sensors used for ADAS and autonomous driving, is a bigger opportunity. With a GM that's already above 65%, Valens has a clear path to becoming highly profitable as revenue grows.
Risks: Valens faces competition from larger chip suppliers such as Broadcom (AVGO) , Marvell (MRVL) , Texas Instruments (TXN) and Microchip (MCHP) . For now, its auto chip sales depend heavily on one automaker (Mercedes-Benz), though the company has said more than 30 automakers and auto suppliers are evaluating its new VA7000 chips. With many enterprise hardware OEMs having built up inventories over the last two years, Valens' commercial AV business could see some inventory corrections. The company is generating (moderate) losses for now, which could make its stock vulnerable to broader selling pressure in long-duration stocks caused by inflation/interest-rate fears.
2. BlackSky Technology (BKSY)
Market Cap: $253 million
Valuation: BlackSky has an EV equal to 3.3 times a 2022 revenue consensus of $65 million and 1.8 times a 2023 revenue consensus of $118 million.
The Elevator Pitch: Using a proprietary constellation of high-res satellites, BlackSky provides subscription-based imagery and analytics services for businesses and government agencies. The analytics capabilities of its platform, which fuses satellite imagery with other data sources (news reports, IoT sensors, etc.) and AI/machine learning models to deliver insights, are a competitive strength, as is the frequency with which BlackSky's satellites can provide imagery for a location of interest. The company has partnerships with firms such as Palantir (PLTR) (also an investor), Airbus and mapping software firm Esri. Corporate interest in deriving intelligence from satellite imagery should be a long-term growth driver for commercial sales, while geopolitical tensions/crises are already becoming a growth driver for its government sales. Long-term contracts with U.S. government agencies provide a measure of revenue visibility. BlackSky's cost structure (high fixed costs, but relatively low marginal costs for supporting more clients/workloads) should drive big increases in its GM (currently in the mid-30s) as revenue grows.
Risks: BlackSky faces competition from larger/older satellite-imagery firms such as Maxar (MAXR) and Planet Labs (PL) . For now, much of its revenue comes from a relatively small number of government contracts. While the company has $111 million in cash and says it expects to be highly profitable by 2025, it's generating sizable losses for now (its sole 2023 free cash flow estimate stands at negative $68 million). The long-duration risks that apply to Valens apply even more so to BlackSky.
3. Luna Innovations (LUNA)
Market Cap: $195 million
Valuation: Luna trades for 45 times a 2022 EPS consensus estimate of $0.13 and 21 times a 2023 EPS consensus of $0.28. However, its EV is equal to just 1.9 times a 2022 revenue consensus of $112 million and 1.7 times a 2023 revenue consensus of $131 million (for now, profits are depressed by large sales investments and M&A-related costs).
The Elevator Pitch: Luna (no relation to the failed cryptocurrency) makes a variety of fiber optics-based test, measurement and sensing products. Its offerings, which provide high-precision measurement and sensing for things such as temperature, movement, strain, thickness and pressure, go into cars, planes, factories, oil & gas pipelines, telecom networks and much else. Current growth drivers include EV adoption (Luna sells products that test EV battery temperatures), 5G network buildouts, rising border security and oil & gas investments, silicon photonics adoption within data center hardware (Luna sells products that aid silicon photonics design/testing) and the growing use of composite materials that require active stress/strain monitoring. Government spending bills might provide a demand boost. The company's recent acquisition of peer LIOS Sensing extends its industrial/infrastructure reach, while the recent sale of its Luna Labs unit makes it a measurement/sensing pure-play. The differentiated nature of Luna's products (many of which are patent-protected) is driven home by the company's high GM (61% in Q2), which together with operating leverage should allow EPS growth to meaningfully outpace revenue growth going forward.
Risks: The fiber optic test/measurement space features a number of players, including some larger firms such as Viavi (VIAV) and KeySight (KEYS) . Cost inflation/supply-chain pressures could potentially become a larger margin headwind. A deeper macro downturn could impact various Luna end-markets. Luna has seen healthy inventory growth in recent quarters (the company says it has built up inventories to deal with supply-chain risks).
Market cap and consensus estimate data for the companies discussed in this article is provided by FactSet.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider VLN, BKSY and LUNA to be a small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
