With small-cap stocks having significantly underperformed large-caps over the last six months, it's not hard to find small-cap tech companies with meaningful growth opportunities that trade at multiples one can only dream of buying larger peers at.
Here are a few tech names with sub-$2 billion market caps that I think present interesting risk/reward trade-offs at current levels. As always, readers are advised to do their own research before taking positions in any of the companies mentioned.
1. Materialise (MTLS)
Market Cap - $1.28 billion
Valuation - Materialise has an enterprise value (EV - market cap minus net cash) equal to 4.8 times a 2022 revenue consensus estimate of $269 million.
The Elevator Pitch - Materialise is a 3D printing play that's now sharply off its highs and has been abandoned by momentum traders. The company has many years of experience developing software and providing 3D printing and engineering services tailored to the needs of sophisticated additive manufacturing clients across a number of industries. Its medical business, which is headlined by a popular 3D modeling software solution known as Mimics, has been steadily growing and now accounts for about a third of the company's sales.
Risks - A slower-than-expected recovery in manufacturing investments by pandemic-impacted businesses could weigh on Materialise's sales. A ton of investor money (from both public investors and VCs) has poured into the 3D printing/additive manufacturing space over the last 12 months, and that could lead to intensified software and services competition.
2. Immersion (IMMR)
Market Cap - $246 million
Valuation - Immersion trades for 8.4 times a 2022 EPS consensus estimate of $0.89. In addition, the company had $107 million in cash on hand at the end of June.
The Elevator Pitch - Immersion is a haptics IP licensing firm that has historically obtained the lion's share of its revenue from smartphone OEMs, but which is now benefiting from greater haptics adoption in everything from cars to gaming peripherals to smart home devices. The PlayStation 5's well-received DualSense controller uses Immersion's IP, and a slew of automotive design wins are expected to ramp over the next two to three years. Over time, AR/VR headsets could be another growth driver.
Risks - Governance and shareholder communications could be better (of course, the stock might not be so cheap if it was). Immersion's guidance is generally vague, and -- in spite of being profitable and flush with cash -- the company has been raising capital in recent months while providing little clarity about how it plans to use the money. The company's interim CEO just stepped down; its legal and IP licensing chief is taking over the job for now. Though not facing any major patent fights right now, there's always a risk with IP licensing firms dealing with deep-pocketed OEMs that one could pop up down the road.
3. Mitek Systems (MITK)
Market Cap - $993 million
Valuation - Mitek trades for 25 times a fiscal 2022 (ends in Sep. 2022) EPS consensus estimate of $0.90. Its EV is equal to 6.8 times a fiscal 2022 revenue consensus of $139 million.
The Elevator Pitch - In the past, Mitek was best-known for its mobile check-deposit software, which is baked into a number of mobile banking apps. However, the company now also has a fast-growing mobile ID-verification software business that (in addition to banks) has reeled in clients such as Airbnb (ABNB) and Instacart, as well as some cryptocurrency exchanges. Mitek has been investing in differentiating its ID-verification offerings by adding support for face/voice biometrics, liveness detection and secure enclaves within NFC chips.
Risks - The ID-verification software space is fairly competitive, with private firms such as Jumio and Onfido also claiming a number of customers. A long-standing patent dispute with the United Services Automobile Association (USAA) hasn't yet been resolved. With Mitek's shares up 26% on the year, it could get caught up in a broader software-stock correction, should one happen.
4. Axcelis Technologies (ACLS)
Market Cap - $1.67 billion
Valuation - Axcelis trades for 16 times a 2022 EPS consensus estimate of $3.03. Also, the company had $220 million in cash on hand at the end of June.
The Elevator Pitch - Axcelis is a supplier of ion implanters used in chip manufacturing. And since the company's implanter sales skew heavily towards mature and specialty manufacturing processes that are expected to be supply-constrained well into 2022, it has all the business it can handle right now. Longer-term, Axcelis should benefit from secular trends such as rising image sensor shipments and growing adoption of silicon carbide (SiC) power semiconductors within electric cars, industrial gear and 5G base stations. Also, the company is making some headway with its efforts to sell implanters for use in advanced logic manufacturing processes.
Risks - If mature-process chip shortages are addressed faster than expected, that could impact Axcelis' orders. The company's Chinese sales could get hit if new export controls are placed on chip manufacturing equipment. Like some other chip equipment makers, Axcelis' stock has had a decent run this year and thus could correct if its peer group sees profit-taking.
