I feel like Twitter's (TWTR) stock is a lot like the microblogging site itself. A lot of noise, a lot of discussion, and very little actual substance to drive it all. Much like the rapidly rising and falling “trending” hashtags, Twitter is all sizzle and no steak.
Twitter was back in the news Wednesday after another disappointing earnings report. The stock cratered, losing 14.5% after it showed weak user growth and existing users signing in less. The company revealed plans to alter its design to attract more users by essentially becoming more like Facebook (FB) , something that likely won’t improve its share price as people looking to invest in something similar to Facebook can invest in, well, Facebook.
Even if you disagree and see enough in Twitter to believe in a turnaround, the bigger question is: why? Why mull the possibilities of a company that has clearly already been parsed over a million times by every analyst and tech blogger from here to Taiwan? Even if I am underselling Twitter’s potential, you have to admit that the actual opportunity to squeeze real value out of this stock is pretty limited. For a company with so many headwinds, so much potential downside, and so many investors already following its every move, the maximum potential returns just don’t seem to be high enough to warrant serious consideration.
More importantly, why buy Twitter when there are so many investment options in the small-cap space?
Tech Plays with Understated Potential
Just because you’re not getting bombarded with headlines about every little thing that happens to these companies doesn’t mean the potential returns are any less real. If you’re ready to dig into the small-cap tech space, I think you’ll find a number of promising companies that a lot of the investment community is likely overlooking while they obsess over whatever happened to Twitter in the last 48 hours, days or months.
We took a look at small-cap tech companies that have solid gross margins, low P/FCF ratios, strong revenue growth, and projections for improved earnings over the next five years. What we got was five companies that should provide at least a starting point for stocks investors can look to before following the crowd and piling on Twitter.
CyberArk Software (CYBR)
Market Cap: $1.87 billion
Gross Margin: 86.6%
Okay, as you may have noted, I’m cheating a little bit on the P/FCF for this one. The reason for that is because our research team recently published a full report on the company, and ultimately came to the conclusion that its margins and position in the rapidly growing cybersecurity space make it an exciting option to consider – despite the inherent risks of an industry that’s constantly in flux.
Web.com Group (WWWW)
Market Cap: $1.18 billion
Gross Margin: 64.3%
Web.com Group provides a wide variety of internet services to small businesses. In a day and age where maintaining a solid website is a key aspect for almost any business, Web.com helps businesses that likely lack the resources to hire an in-house IT professional by letting them outsource the entire process. If you’re a restaurant or a hardware store, offloading the entire process of building and maintaining your website to a third party for a fair price can be a godsend. The company also offers a variety of Internet marketing solutions as well.
After a brutal 2014 that saw the company shed about 40% of its value, Web.com has bounced back in 2015 by more than 20%. The company has posted increased revenue numbers each FY since 2010, and it’s been narrowing losses and building its net and operating margins since 2012. On the whole, buying in now at about $23 a share is at a deep discount on the nearly $37 a share the stock was trading at in early 2014, and the increasing revenue and strong growth margin would point to the potential for big returns.
DTS, Inc. (DTSI)
Market Cap: $487.01 million
Gross Margin: 91.8%
DTS, Inc. is an audio technology provider that specializes in high-def audio solutions for a wide range of electronic devices. The company’s revenue growth since 2010 is not as robust as some of the other companies on this list, but it has turned a profit in every one of those years, save 2012.
The company has struggled in 2015, with recent quarterly reports showing shrinking revenue since the mid-point of last year. If that trend continues, it could mean that the relatively modest profits currently getting produced aren’t in a good place.
However, the technical data could indicate that those issues are already more than priced in. The stock has lost almost a quarter of its value since mid-May, and that selling frenzy could have ultimately pushed the stock into oversold territory. It’s currently sitting on a 14-day RSI just over the 30 level that traditionally represents an oversold stock, and it’s also trading at or below its lower Bollinger Band.
If you’re of the opinion that DTS, Inc. is going to recover from its recent revenue stumbles, then now would appear to be the time to buy in.
Premier Global Services (PGI)
Market Cap: $461.91 million
Gross Margin: 59.3%
Premier Global Services provides business with software that facilitates communication and collaboration. Essentially, it’s a provider of a variety of services like video conferencing, conference calls and webinars. It’s an intriguing sector as more and more companies are expanding their footprint to new areas and need cost-efficient ways to connect team members who may not be working out of the same office.
The company has shown modest but consistent FY revenue growth since 2010, even if profits have appeared to decline slightly over the last two years. The company has lost over 20% of its value in the last year, but that does make it start to look a little bit like a value buy, with P/S falling to 0.82 and forward P/E to 10.51.
And its chart could indicate an interesting opportunity. The stock has been trading in a rising wedge pattern since the start of the year when it experienced a considerable decline. Since then, it has tested support four times. The first three times, the stock bounced back soon after hitting that floor. The fourth time happened in the last week. The stock fell below the rising support level, but appears to have rebounded today.
A rising wedge pattern is traditionally viewed as a more bearish pattern, but a breakout either up or down is possible. If the next few days see the stock continue to stay above support, that could be a sign that the market sees enough potential that it’s going to buy back in when the price falls far enough. In which case, there might be some improved potential for an upward breakout.
Lifelock, Inc. (LOCK)
Market Cap: $809.8 million
Gross Margin: 75.1%
Okay, look, Lifelock is obviously a company with its share of problems. In case you hadn’t heard, the Federal Trade Commission slammed the company last week for violating the terms of a 2010 settlement regarding false advertising. Essentially, Lifelock claims they can prevent your data from being stolen and the FTC is pretty sure they’re promising too much. Lifelock disagrees on this point, but the markets were apparently swayed by the FTC’s side of things as the company shed nearly half its share value last Tuesday.
Then, on Thursday, the company took another hit after it cut guidance in its Q2 earnings report and saw shares plunge another 10%. So, on the whole, Lifelock is a pretty troubled company for the time being. However, there’s an argument to be made in its favor. Namely, that all of this negative news is, at this point, more than priced in. The company’s stock has already paid a severe price for the FTC news and the lower guidance, which could mean that at this point, you’re getting the more appealing elements of the company at a discounted price.
Say what you will about their issues with the FTC (and everyone should listen long and hard to those prior to considering an investment), but the company’s debt to equity ratio is 0, its forward P/E is under 10, and P/C is a hair over 2.75. Further still, the company has continued to grow revenue consistently for almost five years.
Clearly, Lifelock has its share of troubles, but it could also look like an attractive gamble for a risk-tolerant trader. If the share price is indeed bottoming out, and if the long-term effects of the bad press can be limited, Lifelock has the potential to be a strong turnaround candidate.
What is Popular is Not Always Right
Chasing headlines in investing is frequently a mistake. In fact, legendary investor Peter Lynch frequently argued that investing in well-known stocks brought with it an inherent lack of value, with hordes of analysts and institutional investors already squeezing whatever value they can out of the company.
Before you spend a lot of time mulling over the future of Twitter, it might make more sense to sift through the hundreds of under-covered, lesser-known small-cap tech firms out there. The sort of returns available if/when you do find that diamond in the rough can mean that it’s not worth losing any sleep over what the future holds for a company like Twitter.
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