In this article, we’re going to talk about the 12 best small-cap tech stocks to buy.
US Inflation and the Anticipated Fed Cuts
Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.
Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.
AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.
Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.
Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.
Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.
Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.
He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.
Considering that a recession seems unlikely, and a Fed cut of 50 basis point rate seems exaggerated given the economy’s slow but steady growth, we’re here with a list of the 12 best small-cap tech stocks to buy to use today’s market volatility for future gains.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small cap stocks. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
12 Best Small Cap Tech Stocks to Buy
12. Dropbox Inc. (NASDAQ:DBX)
Market Capitalization as of September 11: $7.61 billion
Number of Hedge Fund Holders: 41
Dropbox Inc. (NASDAQ:DBX) is a leading file hosting service that offers cloud storage, file synchronization, personal cloud, and client software to individuals and businesses. It is known for its user-friendly interface and integration with various devices and applications and has positioned itself as a key player in the digital workspace industry.
The company had 18.22 million paying users by the end of Q2 2024, adding approximately 63,000 net new paying users on a sequential basis. It is positioned as an attractive investment opportunity within the tech sector, with 41 hedge funds currently long in the company. The highest stake is valued at $231,760,816 by Renaissance Technologies.
In Q2, it launched a redesigned mobile web experience, extending the experience it launched to web-based customers last fall. Later, the company simplified the mobile trial process by providing clear explanations and reminders. This was followed by a change in an old policy that required customers to buy additional products for all employees, now they can buy them for specific subsets of their Teams.
The second quarter this year recorded a 1.93% year-over-year improvement, generating a revenue of $634.50 million. The average revenue per paying user was $139.93. It also repurchased just over 11 million shares, spending $260 million in the same period.
Currently, it’s working on a feature that lets customers buy products individually, without needing a subscription. This will make it easier to sell company products, especially Dash.
Dropbox Inc.’s (NASDAQ:DBX) AI-powered products, like Dropbox Dash, offer significant growth potential. By improving user experience and productivity, it can expand its market share in the enterprise segment. Campaigns aimed at increasing product visibility and driving sales all position the company for strong growth.
11. Wix.Com Ltd. (NASDAQ:WIX)
Market Capitalization as of September 11: $8.55 billion
Number of Hedge Fund Holders: 42
Wix.Com Ltd. (NASDAQ:WIX) is an Israeli software company that provides cloud-based web development services, offering tools for creating and managing HTML5 websites and mobile sites using online drag-and-drop editing, making it easy for people with no coding experience to build professional-looking websites.
The firm has launched a product called the Wix Studio that helps businesses create websites easily. It’s becoming more popular as more businesses look for simple ways to set up their online presence. Wix Studio continues to grow, with new features and tools for partners, also recently launching a Figma plugin that has been well-received. Studio bookings increased 20% quarter-over-quarter in Q2.
For the second quarter of 2024, the company generated a total revenue of $435.75 million, recording a year-over-year improvement of 11.74%. The commerce business performed extremely well with transaction revenue growing 21%.
The growth was driven by an impressive 15% year-over-year increase in overall bookings growth, which was at 10% in Q1. The earnings per share were $1.67.
The company operates a total of 17 AI business assistants. In June, it launched AI tools for the mobile app builder. This lets users create and edit apps using AI chat. There are additional AI features to help users find blog topics, generate outlines and content, and create images, making it easier to create engaging content.
Wix.Com Ltd.’s (NASDAQ:WIX) AI technology is a key competitive advantage and will drive future growth. The company has made significant progress in the first half of 2024 and is well-positioned for continued success. As of June 30, 42 hedge funds held positions in the company, with the largest one valued at $298,574,390 by Starboard Value LP.
Here is what Baron Global Advantage Fund has to say about Wix.com Ltd. (NASDAQ:WIX) in its Q3 2023 investor letter:
“Our biggest add in the quarter was Wix.com Ltd. (NASDAQ:WIX). Wix provides a cloudbased software to help micro-businesses build and maintain websites. We have been investors in Wix since 2017, and despite decelerating sales growth due demand pulling forward during the early days of COVID, which has impacted the share price, we believe the company is making significant progress towards profitability and expanding its opportunity in the partners (professional website development) segment. After years of penalizing nearterm profitability with investments in sales and marketing, the company is now taking advantage of its leading brand name to acquire incremental users mostly organically, which enabled it to improve non-GAAP operating margins by 21% year-over-year to 18% for the most recently reported quarter. During its Investor Day, the company further guided to FCF margin targets of 19% in 2024 and 25% in 2025, which we believe could prove conservative as the mix of revenues shifts over time to the partners segment, which is structurally more profitable than the do-it-yourself segment. This is namely because Wix only needs to acquire a partner once, while the partner serves as an external sales force for Wix, creating a highly effective subscriber acquisition channel. Additionally, businesses that hire partners tend to have less churn, have higher business volumes, and adopt additional modules from Wix to drive higher revenue per subscription. While the advancements in AI remain a risk to be cognizant of, we believe Wix will benefit from AI. The company has been investing in AI for over five years now. AI lowers the hurdles for starting new businesses and designing websites (through Wix’s AI site generator) makes existing businesses more successful over time. We believe that Wix trades at an attractive valuation with an FCF yield of over 5%, despite profitability being penalized due to reinvestments back into the partners segment, which investors value below zero (masking the profitability of the do-it-yourself segment). As the partners segment becomes profitable over the next few years, we believe Wix’s overall FCF will move much higher.
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