Top 3 Small Cap Tech Stocks to Ride Out A Trade War
Small-cap tech stocks are usually a fertile ground to find additions to a growth portfolio. And for the last week, we’ve been watching as markets have slipped on rising US/China trade tensions.
At Goldman Sachs, an analytic team led by David Kostin laid out the case for stocks in services companies: “Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods companies.” This doesn’t mean that they won’t be affected by a general market down-turn, but they may be somewhat insulated from the long-term effects of this new round in the US/China trade war.
It all adds up to a neat conclusion: small cap cloud tech service stocks should hold the investment opportunities you’re looking for. Let’s take a look at the TipRanks data on a few good examples.
We’ll start with a B2B company. SPS Commerce provides cloud-based supply chain management software to a variety of commercial clients: retailers and their suppliers, and the logistics companies that connect them. In short, SPS provides support for the supply chain essential for all commerce.
It’s a lucrative niche for a company that gets it right, and SPS has been leveraging its success to make acquisitions. Its most recent move, at the end of last year, saw the company acquire CovalentWorks, an electronic data interchange company, for $20 million in cash plus $3 million in stock. SPS forward guidance shows the acquisition boosting 2019 calendar year revenues by $4.5 million.
The company’s rosy outlook was confirmed in spades with its April 25 earnings report for Q1. The report detailed the 73rd quarter in a row of topline growth, with $66.9 million in revenues compared to $59.1 million for the year-ago quarter. EPS, at 38 cents per share, was similarly strong, and represented a 26% beat of the forecast.
Top analysts are clearly impressed by SPSC’s performance. Northland Securities’ Tim Klasell (Track Record & Ratings) writes, “We think this is a multi-year margin improvement story… and would not be surprised to see more upside.” His price target, $125, already suggests an upside of 22% to this stock.
Koji Ikeda (Track Record & Ratings), of Oppenheimer, gives a slightly more cautious price target and upside – $120 and 17%, respectively – but clearly states the strengths of the company: “Positives include: 1) another good and consistent execution quarter; 2) expanding operating and EBITDA margins; and 3) the integrations of the recent acquisitions appear to be on track… Bottom line: SPS Commerce continues to deliver good results within its balanced growth and profitability framework… We think the consistent and good execution continues in the future…”
SPSC holds a ‘Strong Buy’ rating from the analyst consensus, based on a unanimous 6 buys given in the last three months. The stock sells for $102, so the average price target of $120 suggests an upside of 17%.
Unlike the other stocks in this article, Zendesk provides both software packages and cloud offerings, both in the customer service industry. Zendesk’s customers are businesses in need of support software, data analytic systems, and chat, messaging, and video connection services.
Zendesk reported almost 40% year-over-year revenue growth, to $181.5 million for the quarter, but a net operating loss. Reported loss per share was 28 cents, in line with expectations. On the positive side, the company also reported steady customer base growth, with 9,000 new paid accounts in the first quarter, and an increase in the portion of recurring customers with at least 100 support agents.
Wall Street has not been worried by the operating losses, seeing Zendesk as a clear growth opportunity. Canaccord analyst David Hynes (Track Record & Ratings) writes that “Zendesk is well positioned in its core small and mid-market effort with Suites and now Sell… and that Sunshine represents a compelling longer-term opportunity as organizations look to modernize and configure customer experience platforms.” He gives the stock a $100 price target, showing his confidence in a 19% upside.
Samad Samana (Track Record & Ratings), five-star analyst from Jefferies, concurs, saying, “The company beat Q1 consensus revenue, billings and operating margin… guidance will likely prove conservative as enterprise tends to perform better after Q1.” Samana sets a $102 target on ZEN, suggesting an upside of 21%.
Overall, ZEN is another ‘Strong Buy,’ with the consensus based on 11 buy ratings and 2 holds from the past three months. The stock sells for $83, with an average price target of $101. That gives a potential upside of 21%.
Zoom only went public in April, so there is no quarterly report to look at – yet. The company will start reporting in June with the current quarter’s results. We can look at the IPO and the current share price, and we see that ZM shares rose quickly. Starting at $36 on April 17, ZM has doubled in just one month and now sells for $72.
That’s not bad stock performance at all for a company founded just 8 years ago. It’s backed up by Zoom’s position as a leader in cloud-based video calling, conferencing, and chat software.
The strong IPO has quickly attracted notice from Wall Street’s top analysts. Sterling Auty (Track Record & Ratings), of J.P. Morgan, writes, “Zoom is a technology that will help fundamentally change the way that business is conducted going forward. The potential for much greater penetration in a bigger portion of businesses for its core video collaboration technology and add-on phone solution provides a foundation for growth and profitability at a scale not seen in software before.” Auty gives ZM stock a $113 price target, suggesting an impressive 55% upside potential.
Also giving high marks to ZM is Alex Zukin (Track Record & Ratings), writing from Piper Jaffray. Zukin is more cautious with his price target, setting it at $90 with a 24% upside, but his effusive in his comments. Zukin writes, “Zoom is fulfilling the broken promises around decades old unified communication systems… The company's triple digit growth and profitability profile make it a unicorn among unicorns that should lead to a sustained premium multiple.”
Overall, ZM holds a ‘Moderate Buy’ from the analyst consensus, based on 4 buy ratings and 8 holds. Most of the hold ratings express more caution for a newly public stock than negativity, such as RBC Capital’s Matthew Hedberg (Track Record & Ratings) who describes the company as a “premium disruptive software vendor,” and praises the “large and growing total addressable market, disruptive growth metrics, high gross margins and free cash flows, as well as its high quality management team.”
Zoom’s stock currently sells for $72. At $78, the average price target suggests an 8% upside.
Author: Michael Marcus