Investing in small-cap stocks - shares of companies with relatively modest market capitalizations, typically between $300 million and $2 billion - can be highly rewarding, as they generally have greater growth potential than larger, well-established businesses.
However, as risk and reward often go hand-in-hand, small-cap stocks do tend to carry higher risk, and are often more volatile. That's why investors need to be cautious and conduct thorough research before making investments into small-cap stocks.
Specifically, investors could consider shares of companies with solid growth prospects and the ability to deliver sustainable profit in the long term. Most importantly, investors should avoid putting all of their money into a single small-cap stock, and should focus instead on diversifying their portfolios to reduce risk.
From this perspective, Similarweb (SMWB) and CSG Systems International (CSGS) are two small-cap tech stocks worth keeping an eye on. Let’s take a look at the factors to understand why these stocks should be on your radar.
Similarweb
Similarweb, a digital data and analytics firm, specializes in offering software solutions, an application programming interface (API), and freemium options for estimating website and app traffic. The company's primary revenue source stems from paid annual subscriptions to Similarweb Digital Data.
Over the past year, Similarweb's stock is down more than 20%. This drop can be attributed to macroeconomic challenges that have pressured enterprise budgets, resulting in prolonged sales cycles and negatively affecting its net retention ratio.
While these macroeconomic challenges may persist in the short term, it is encouraging to note that the company has maintained stable customer acquisition and logo retention among its high-value customers, defined as those generating annual recurring revenue of $100,000 or more in the most recent quarter.
Additionally, Similarweb's commitment to enhancing profitability is noteworthy. The company has made substantial strides in reducing losses, and reported a notable 35% increase in its adjusted operating margin in Q2. Furthermore, Similarweb is on track to achieve positive free cash flow by the fourth quarter.
Overall, Similarweb boasts a sizable addressable market, a solid base of recurring revenue, the capability to acquire and retain high-value customers, and a growing number of customers opting for multi-year subscriptions, all of which bode well for its long-term growth. Further, the company has strengthened its generative artificial intelligence (AI) capabilities by introducing SimilarAsk, which promises increased efficiency, improved product development cycles, and enhanced product adoption.
Investors should closely monitor Similarweb's stock, as any alleviation of pressure on customer budgets could pave the way for robust growth and support its share price.
Seven out of eight analysts have rated SMWB a “Strong Buy,” and one analyst has a “Hold.” These analysts have a 12-month average price target of $9.43, which implies significant upside potential of about 80% from current levels.
CSG Systems International
CSG Systems International provides revenue management, customer engagement, and billing and payments solutions. It primarily focuses on the telecom, wireless, and broadband sectors. The company is poised to thrive due to robust market demand for its Software as a Service (SaaS) offerings, as well as its ability to secure significant new clientele.
In the first half of 2023, the company reported impressive 11.1% revenue growth, driven entirely by organic expansion. Remarkably, these results mark the company's most outstanding performance in the first half of a year in nearly two decades. With the sustained business momentum, CSG Systems has upwardly revised its revenue and earnings projections for 2023.
Additionally, the company is committed to enhancing shareholder returns, and added $100 million to its share repurchase program slated to run through 2024.
Looking ahead, CSG has a substantial and robust sales pipeline as it continues to attract new customers. Furthermore, the company is diversifying its portfolio by entering new verticals and rapidly growing industries such as technology, retail, financial services, and insurance.
CSG Systems maintains its profitable status and boasts a robust balance sheet, positioning itself favorably to expedite its growth through selective acquisitions.
Overall, CSG Systems has the potential to deliver solid growth in the coming years. Echoing similar sentiments, six analysts have unanimously rated CSGS stock a “Strong Buy.” Further, the 12-month average price target of $72.40 implies about 40% upside potential from current levels.
