When it comes to stock market gains, sometimes the biggest growth opportunities come from under-the-radar small-cap stocks. These equities often fly low, escaping mainstream attention while offering potential for substantial returns. Investing in them, sure, it’s a bit like panning for gold—you have to put in the hard yards to uncover the nuggets. But today, let’s uncover three small-cap stocks that could deliver big rewards, albeit with considerable risk.
Spurting Growth with Sprout Social (SPT)
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Sprout Social (NASDAQ:SPT) isn’t a fledgling in the tech space with its $3.7 billion market cap, but it took a November rally to soar out of the traditional small-cap range. Providing social media management services, Sprout Social has attracted over 30,000 customers, ranging from corporate giants to small entities. The company’s entry-level plan starts at $249 per month, and its third-quarter 2023 earnings report demonstrated a 31% year-over-year revenue growth, hitting $85.5 million. The firm has shown promising financials with its annual recurring revenue and remaining performance obligations marking substantial upswings.
However, despite witnessing a 250% leap in share prices in the last five years, profitability concerns have held Sprout Social back. With the company battling a $23 million GAAP loss in the recent quarter, investors have been on the edge. Nonetheless, if Sprout Social manages to trim down its losses and inch closer to profitability in the upcoming quarter, it could very well trigger a substantial stock rally. As they say, high risk often invites high rewards, and Sprout Social could well embody this notion.
Direct Digital Holdings (DRCT)
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Direct Digital Holdings (NASDAQ:DRCT) might not currently be a small-cap stock, but with its $240 million market cap, it’s certainly knocking on the door of the club. Bolstered by a staggering 500% surge since November, this programmatic advertising company showed some serious muscle in its Q3 2023 earnings report. The revenue catapulted by 129% year-over-year, with a projected full-year revenue growth of 101%, marking an uptick from the preceding quarters. Colossus, Direct Digital Holdings’ sell-side advertising platform, was the big money-spinner, witnessing a whopping 174% revenue surge, while the buy-side advertising revenue also clocked an impressive 10% swell. Encouragingly, the lion’s share of the company’s total revenue is derived from its sell-side platform, standing at over 85%.
Direct Digital Holdings also quadrupled its net income in this quarter—impressive by any measure. If it continues this strong momentum and manages to boost its profit margins into the double digits, this stock could potentially deliver hefty returns in the long run. Clearly, Direct Digital Holdings seems primed to be one of those darling, high-risk, high-reward small-cap stocks that investors should keep an eye on.
Perion (PERI)
Perion: AdTech Company Sees Shares Plummet Despite Positive Earnings Report
Perion’s Growth and Earnings
Perion (NASDAQ: PERI) has made significant strides in various advertising channels, yielding a 12% year-over-year revenue increase. This quarter showcased considerable growth in Search, CTV, and Media. However, despite this positive news, the company faced a steep 20% decline in its shares following a decent earnings report.
The market reaction, creating a buying opportunity, is unwarranted given Perion’s impressive track record. Over the past five years, the company has achieved a remarkable 694% gain, indicating a strong potential for recovery.
Challenges and Upsides
One area of concern in the earnings report is the modest 2% year-over-year growth in GAAP net income, which requires attention in forthcoming quarters. However, the company’s stock still remains an attractive investment opportunity, given its forward P/E ratio of 8 and a 0.35 PEG ratio.
Risk with Search Advertising Revenue
Perion’s search advertising revenue grew by 33% year-over-year. However, this revenue stream is reliant on a partnership with Bing, and its renewal is uncertain as the contract is due to expire in 2024. The market’s apprehension is warranted, but considering the decade-long collaboration between the two companies, the renewal of the contract is quite probable.
Prospects and Conclusion
Despite the current market reaction, Perion is poised for potential growth, especially if the contract with Bing is renewed as anticipated in October. Investors should consider the long-term potential and the favorable valuation metrics of Perion stock.
It’s important to note that the opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Marc Guberti, a finance freelance writer at InvestorPlace.com and host of the Breakthrough Success Podcast, disclosed his long positions in DRCT and PERI at the time of publication, emphasizing the potential value in the respective stocks.
