Small-Cap Champions: 7 David-Like Stocks Ready to Take Down the Goliaths

Stocks to buy

Small-cap stocks are currently drawing considerable attention from numerous investors, including myself. Generally, these smaller companies boast more attractive valuations compared to their large-cap peers, presenting an opportunity for the significant returns that investors often pursue.

The previous year was marked by a notable narrowness in market performance, dominated by the “Magnificent Seven,” which drove nearly all the gains seen in the S&P 500 and Nasdaq indices. This year, however, could be the beginning of a signal or turning point for small-cap stocks, which may rebound from their underperformance, particularly as many of the larger and mega-cap stocks are now perceived as overvalued by many market participants.

To leverage this segment’s full potential, here are three small-cap stocks currently overlooked by the market that have the potential to generate substantial returns. Although these companies are risky, they may appeal more to some than penny stocks or cryptocurrencies such as Bitcoin (BTC-USD), offering a blended risk-to-return ratio.

Palantir Technologies (PLTR)

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Palantir Technologies (NYSE:PLTR) stands out with its robust performance in the latest quarter, marking it as a strong contender among small-cap stocks. As of March 31, 2024, Palantir reported a revenue of $2.33 billion year-to-date, a gross profit of $1.5 billion, and an earnings per share (EPS) of $0.12.

The company has recently secured a $178 million contract with the U.S. Army to develop a next-generation intelligence ground station​ (GovCon Wire)​. Additionally, Palantir raised $500 million in a new funding round.

The company’s profit margin reached 12.8%, indicating efficient operations and its return on equity stood at 9.13%. Notably, its quarterly revenue growth year-over-year was 20.8%.

Despite its compelling fundamentals, the market gives mixed signals about Palantir’s valuation, with a high Price to Earnings (P/E) ratio of 22.54 and an even steeper EV to EBITDA ratio of 170.56. Yet, the significant quarterly earnings growth of over 4% year-over-year and a bullish forecast that anticipates revenue to soar to $5.99 billion by 2028 underscore a potentially lucrative growth path.

Plug Power (PLUG)

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Plug Power (NASDAQ:PLUG) presents a mixed investment picture in its latest financial and operational performances. As of the first quarter of 2024, the company reported revenues of 120 million but struggled with significant operational losses, reflected in an EBITDA of negative $1.34 billion year-to-date. The company’s EPS stood at a concerning -$2.41.

Despite these financial setbacks, the company’s strategic initiatives in the hydrogen fuel cell sector might offer a bullish case for long-term growth. Analysts’ opinions are varied, with a majority recommending a hold, which might reflect uncertainty about the company’s immediate financial health versus its long-term potential. The company’s stock has experienced volatility, currently trading significantly below its 52-week high.

However, the company recently announced a major deal involving the sale of its largest backup power system yet to a provider in California’s wine country. This marks an important expansion from their traditional smaller-scale projects into larger utility-scale applications. This means it could be on a promising path to profitability.

Pinterest (PINS)

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Pinterest (NYSE:PINS) is a relic from the Web 2.0 era that has managed to carve out a competitive niche for itself as an image-sharing software and social media network. Pinterest primarily targets the U.S. and international markets from its San Francisco headquarters. 

Recent financial metrics reflect a company on the rise: it reported robust quarterly revenue, translating into a gross profit of $2.49 billion year-to-date, with modest EPS of $0.22. The company’s latest quarterly results also show healthy revenue growth of 12.80% year-over-year.

Encouragingly, Pinterest’s strategic focus seems to be on an upward trajectory. Analysts maintain a largely optimistic outlook dominated by ‘Buy’ ratings. The target price of $45.92 suggests a potential upside.

Some growth drivers for PINS include its partnership with Amazon (NASDAQ:AMZN) as an advertising partner, which could shore up additional earnings. This makes PINS truly one of those David-like stocks, able to compete with some of the largest social media stocks.

Upwork (UPWK)

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Upwork (NASDAQ:UPWK) exemplifies a small-cap contender poised for substantial growth. As an online talent marketplace, Upwork has demonstrated solid performance in its latest quarterly results, with revenue of $190.94 million. This includes a robust profit margin of 6.7% year-to-date. These figures highlight quarterly revenue growth year-over-year of 18.7%. Moreover, the company has reported an EBITDA of $63.47 million a year to date, with earnings per share EPS at $0.34, reflecting consistent profitability.

UPWK has strategically pivoted towards AI, using it internally, teaching AI skills to its users, and connecting AI experts with those seeking their expertise. Despite initial concerns that AI would replace freelancers, Upwork’s embrace of AI has led to strong revenue growth, improved profitability and reduced costs. This is a strong trend that will continue.

Analysts remain optimistic, with a majority recommending ‘Buy’ and a target price of $18.3, underpinning a bullish thesis. Furthermore, projected revenue growth with a CAGR of approximately 17.5% until 2027 and an anticipated improvement in EPS from negative figures to $1.75 mean there’s a few things to look forward to.

Roku (ROKU)

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Roku (NASDAQ:ROKU), a prominent player in the TV streaming platform industry, demonstrates both potential and challenges in its recent performance. 

Despite a striking 19% year-over-year revenue growth in its latest quarter, Roku faces considerable financial strains, evidenced by a $3.98 loss per share and a negative EBITDA of $223.64 million year-to-date. The company’s operating margins and profitability metrics highlight ongoing struggles, with a 15.6% profit margin and a -23.1% return on equity.

Analyst sentiment, while mixed, also leans towards optimism, with more buys than sells. A target price of $75.75 underpins potential upside.

Roku’s Q1 2024 operational highlights include reaching 81.6 million active accounts (up 1.6 million from the previous quarter), increasing streaming hours to 30.8 billion (from 29.1 million in Q4 2023), generating $754.9 million in platform revenue and $126.5 million in device sales.

ROKU has strong momentum, and I believe it’s undervalued relative to its growth potential and recent performance.

Block (SQ)

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Block (NYSE:SQ) strongly marks its presence in the fintech sector. The company’s latest quarterly results from March 2024 show promising metrics. Despite a modest profit margin of 1.68%, the operating margin and return on equity indicate effective operational management with values at 4.19% and 1.94%, respectively — the earnings per share EPS stand firm at $0.60.

Analysts hold a favorable view, as reflected in their ratings — 35 out of 47 recommend a buy or strong buy, with an analyst target price pegged at $91.09. Given the current trading around the $72 mark, this represents a potential upside. The robust revenue growth year-over-year of 19.4% and a recent quarterly earnings growth of 3.25% showcase a resilient expansion trajectory.

SQ has recently been criticized over concerns that it may have processed transactions linked to terrorist groups or in violation of economic sanctions. The probe follows allegations from a former employee who claimed several lapses in compliance practices at Block.

However, these kinds of scandals are relatively common for fintech companies, and the company’s recent share sell-off last month represents a one-time rather than structural weakness.

Teladoc Health (TDOC)

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Teladoc Health (NYSE:TDOC) is a growing player in the virtual healthcare sector, with significant potential despite prevailing financial challenges. With a market capitalization of approximately $1.8 billion and a substantial share base of nearly 169.6 million, Teladoc extends its services globally.

However, the company grapples with profitability issues, evidenced by negative earnings per share EPS of $1.41 and a net profit margin of -8.9%. These figures suggest a disconnect between revenue growth and bottom-line results, exacerbated by an operating margin of -11.9%.

In saying this, Investors should note Teladoc’s significant revenue growth projections, with forecasts suggesting a leap to $3.24 billion by 2028. This expected surge points to a bullish outlook on Teladoc’s ability to scale operations and capitalize on the growing demand for telehealth solutions.

TDOC, like other hot pandemic stocks that were all the rage in the 2020s, has returned to Earth again, but I believe that remote healthcare is a field that will come under renewed enthusiasm, making it one of those best small-cap stocks to buy.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.

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