Everyone knows megacap stocks like Apple, Microsoft, and Nvidia. But what about the little guys? Small-cap stocks -- companies with a market cap of between $250 million and $2 billion -- can be a valuable addition to many portfolios. After all, these smaller companies sometimes catch fire and produce outsized returns.
With that in mind, let's take a closer look at three small-cap stocks worthy of further consideration for investors looking to put $1,000 to work: Innodata(NASDAQ: INOD), Amplitude(NASDAQ: AMPL), and SoundHoundAI(NASDAQ: SOUN).
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An AI-driven surge could transform this software company
Will Healy(Innodata): Innodata is not a household name despite trading on the markets since 1993. Nonetheless, it may be one of the companies set to climb out of obscurity thanks to AI.
Innodata is a draw because its low-code software platform can help customers utilize traditional and generative AI to automate processes, perform manual tasks, and train models. This frees workers to spend time on other duties and endeavors.
Despite competition from the likes of Accenture and Globant, the company's prowess in generative AI helped it put master service agreements in place with five of the Magnificent Seven companies. This is a notable feat for a company with a market cap barely above $470 million.
Still, its improved financials caught the eyes of investors. In the first half of 2024, revenue of $59 million rose 54%, compared with the same period in 2023. Also, Innodata earned $975,000 in the first two quarters of 2024, a dramatic improvement from a $2.9 million loss in the first half of 2023.
Additionally, investors will like its stock price growth, which is up over 90% this year and more than 1,000% over the last five years.
Innodata's move to profitability is too recent to give investors a meaningful P/E ratio. Still, the forward P/E ratio is only 35, a low level considering its revenue growth.
Admittedly, small-cap stocks present risks, and indeed, Innodata stock could turn negative if the generative AI market struggles or its mega-tech client base turn to competitors. However, if the stock stays on its current trajectory, a significant investment could lead to life-changing gains.
Amplitude is ready for bigger things after working through some challenges
Justin Pope (Amplitude): With just a $1 billion market cap, Amplitude is my pick. The company sells advanced data analytics software that helps companies track customers as they use digital products and services. In other words, Amplitude will track a user's decisions, clicks, and tendencies to help inform a company how to best market their product to you.
Alphabet is the incumbent leader in digital web and product analytics, but Amplitude believes its platform packs more features and offers customers more control and transparency.
Sounds great, right? There's one problem: Revenue growth slowed dramatically since 2022.
The company's management said that customers overinvested in its platform during zero percent interest rates and have scaled back as they renew these contracts at lower amounts. Management also changed Amplitude's sales strategy, making it easier for customers to ramp up their spending when transitioning from the free plan to paid features.
Management believes growth should soon reaccelerate, with potential bottoming growth in Q3 after terminating contracts with Russian customers due to sanctions related to Moscow's ongoing war with Ukraine. Amplitude raised its full-year sales guidance despite the anticipated Q3 headwinds.
It sounds promising, but ultimately, investing in Amplitude takes a bit of a leap of faith that it can deliver faster growth in the coming quarters. However, what's great is that the company is financially strong, so I don't see as much risk here in the near term. Amplitude has been free cash flow positive over the past year and has about 30% of its market cap in cash versus zero debt. The stock's enterprise value-to-sales ratio is just 2.5, among the cheaper software stocks on Wall Street.
If better growth and business results lift Wall Street's sentiment toward the stock over the coming year and beyond, there's a lot of room for investment returns.
Demand for SoundHound AI's voice solution products is sky-high
Jake Lerch (SoundHound AI): SoundHound AI is an artificial intelligence (AI) company that provides its customers with AI voice solutions across various fields.
For example, the company has worked with Honda, Hyundai, and Jeep to assist with voice-activated technology in their vehicles. It's also at the forefront of smart ordering and AI-assisted drive-thru technology.
For those unaware, the dining industry -- seeking to boost its own profit margins -- wants to automate customer service. SoundHound is working with numerous brands such as Papa John's, ChipotleMexicanGrill, and Jersey Mike's to streamline the customer experience by utilizing AI-powered voice interactions when and where possible.
Consequently, SoundHound's revenue is taking off. As of its most recent quarter (the three months ending on June 30), the company reported revenue of $13.5 million, up 54% year over year. Trailing 12-month revenue stands at $55.5 million, up from $46 million a year ago.
While SoundHound AI is not profitable or free cash flow positive, it does have a healthy balance sheet. The company has $200 million in cash and only $4 million in debt.
Granted, SoundHound AI is not a stock for every investor. Yet for growth-oriented investors with a high risk tolerance, SoundHound AI is worth consideration, given its position in a fast-growing, innovative field.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet and Nvidia. Justin Pope has positions in Amplitude. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Accenture Plc, Alphabet, Apple, Chipotle Mexican Grill, Globant, Microsoft, and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short December 2024 $54 puts on Chipotle Mexican Grill, short January 2025 $310 calls on Accenture Plc, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
