Small-Cap Sultans: 3 Stocks Ready to Claim Their Thrones in the Market

Stocks to buy

Small-cap stocks attract significant attention from investors due to their more attractive valuations than large-cap peers, presenting opportunities for substantial returns. The previous year was dominated by the “Magnificent Seven,” which drove nearly all the gains in the S&P 500 and Nasdaq indices. 

However, this year could mark a turning point for small-cap stocks as they rebound from underperformance, while many larger and mega-cap stocks are perceived as overvalued. With market capitalizations between $300 million and $2 billion, these companies can adapt quickly to market changes and capitalize on niche opportunities. 

Despite lagging the broader market since last May, small-cap stocks are trading at more attractive valuation ratios than large-cap stocks. Now could be an opportune time for investors to allocate a portion of their portfolio to these companies. This article presents three of the best small-cap stocks to consider.

Small-Cap Stocks: LivePerson (LPSN)

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LivePerson (NASDAQ:LPSN) provides artificial intelligence-based messaging solutions for businesses. The company is a leader in AI-driven customer engagement and has a robust growth outlook.

LPSN reported total revenue of $85.1 million for the first quarter of 2024. It exceeded the high-end of its guidance range, though it marked a 20.9% decrease compared to last year. The company signed 40 deals during the quarter, including 12 new customers and 28 renewals or expansions. The trailing twelve-month average revenue per enterprise and mid-market customer increased by 11.6% to $625,000.

Adjusted EBITDA for the first quarter was $0.5 million. That’s a notable improvement from the adjusted EBITDA loss of $1.3 million in Q1 2023. However, the net loss for the quarter widened to $35.6 million or 40 cents per share. Last year, net loss was $17.4 million or 23 cents per share in the same period.

With the AI revolution still kicking off, I believe that LPSN’s presence will only grow in time, and its tiny valuation of just 0.14 times sales means it can snatched up at a bargain.

Enphase Energy (ENPH)

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Enphase Energy (NASDAQ:ENPH) designs and manufactures software-driven home energy solutions. This includes solar generation, home energy storage, and web-based monitoring and control.

The company’s Q1 2024 financial results highlighted a decrease in revenue to $263.3 million from $302.6 million in the previous quarter. The company reported a GAAP net loss of $16.1 million, contrasting with a non-GAAP net income of $48.0 million. During this period, Enphase shipped 1.38 million microinverters and 75.5 MWh of IQ Batteries.

The outlook for Q2 2024 is optimistic, with expected revenue between $290 million and $330 million. GAAP gross margins are projected to be between 42-45%, and non-GAAP gross margins between 44-47%. The company anticipates higher shipments of IQ Batteries and microinverters, which will contribute to this growth.

I think ENPH could be one of those small-cap sultans because analysts are predicting mid-double-digit increases in its revenue and earnings per share (EPS) from 2024 to 2028, fully taking advantage of the world’s pivot to clean energy.

Digital Turbine (APPS)

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Digital Turbine (NASDAQ:APPS) offers a platform for mobile carriers and device OEMs to simplify app discovery. It has seen strong growth driven by the proliferation of mobile devices and increasing app usage.

In Q4 2024, the company achieved revenue of $112.2 million. That’s a 20% decline from $140.1 million in the same quarter the previous year. The company experienced a significant net loss of $236.5 million. This was primarily influenced by a non-cash goodwill impairment charge of $189.5 million.

Looking ahead to fiscal year 2025, Digital Turbine expects revenue between $540 million and $560 million. Moreover, non-GAAP adjusted EBITDA is expected to come in at $85 million to $95 million. Despite the past year’s setbacks, the company remains focused on expanding its mobile platform offerings and improving its financial performance.

Notably, impairment charges are not to be feared if the rest of the business is solid with a positive trajectory. With AAPS trading at just 3.2 times forward earnings, I think it’s undervalued. The ongoing penetration of the mobile device market makes it potentially a small-cap sultan in the making.

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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