Small-caps may be poised for another lackluster year, but according to Luke Barrs, asset manager and global head of client portfolio management for the investment bank Goldman Sachs, there are compelling factors that make them an attractive investment choice.
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Acknowledging the risks and poor sentiment that characterize the current market, Barrs goes on to say, “There are many parts of the small-cap space that are being penalized due to the macro concerns of the past couple of years.” He further adds that as inflation starts to decline, the environment “should provide a very positive backdrop for the growth of these assets.”
Following this train of thought, some of the top stock analysts at Goldman Sachs have been recommending buying into small-cap stocks. Their picks have several important features in common: a market cap below $1 billion, severe underperformance this year compared to the overall market, and plenty of upside potential looking forward.
Using the TipRanks platform, we’ve pulled up the details on two of these stocks. Here they are, along with comments from the Goldman analysts.
Stem, Inc. (STEM)
We’ll start with Stem, a leader in the global market for clean energy. Stem uses AI to optimize solutions in renewable power and energy storage, two vital segments of the clean energy industry. The company’s product line includes solar power installations, solar power monitoring systems, standalone energy storage systems, electric vehicle charging points, and even a combination of all these. Stem’s AI platform allows customers to balance their on-site power generation and storage capabilities with their grid power connections, enabling them to realize significant utility bill savings.
Stem has achieved this through the development of its Athena platform, the most utilized AI system in the field of clean energy management. The company uses machine learning to train its AI, basing it on the combined data from tens of millions of runtime hours. Stem offers its platform to customers around the world, and the best-in-class software is in use at more than 200,000 solar installations, where it manages more than 25 gigawatts of power assets. Stem has assessed its addressable market in AI-managed clean energy at more than $1 trillion over the next 30 years.
Despite having a world-class product in a sector that benefits from both social and political goodwill, Stem’s shares have fallen this year, dropping 56% year-to-date.
Those losses came on the heels of a 4Q22 report that showed revenue missing the forecast, a deep earnings loss. The negative sentiment was partly reversed by the 1Q23 results, released earlier this month.
For Q1, Stem showed a top line of $67.4 million. While down from Q4’s record $156 million, the Q1 result beat expectations by about $4 million and grew an impressive 63% year-over-year. The company’s GAAP EPS figure, a 29-cent loss, was 5 cents worse than expected, but the non-GAAP loss of 22 cents per share was in line with expectations. The non-GAAP gross margin of 19% was up from 16% in the prior-year period.
Stem also reported several metrics that bode well for future business. The company had $206 million in liquid assets at the end of Q1, and quarterly bookings rose y/y from $151 million to $364 million. The company’s contracted backlog, a good measure of future work and revenue, also more than doubled year-over-year, from $565 million to $1.24 billion.
Stem’s potential, and its good start to 2023, caught the attention of Goldman Sachs’ 5-star analyst Brian Lee.
“STEM reported a solid start to the year as 1Q23 revenue came in above GSe/consensus and above the high end of guidance while STEM also reported a strong improvement in gross margins. The results are encouraging, in our view, that STEM remains on track to hit a key milestone of achieving positive adj. EBITDA in 2H23,” Lee opined.
“To that end,” the analyst continued, “STEM delivered on growth in key metrics to help drive profitability including in software services and margins on recent bookings and pipeline. Looking ahead, we believe quarterly execution is one of the primary catalysts for the stock, particularly as STEM’s guidance is calling for 75% of revenue in 2H23.”
Lee’s comments support his Buy rating on STEM shares, and his $11 price target implies a robust one-year upside potential of 167%. (To watch Lee’s track record, click here)
Overall, STEM gets a Moderate Buy from the Street’s analyst consensus, based on 10 analyst reviews that include 7 Buys, 2 Holds, and 1 Sell. The Street’s average target of $10.98 is practically the same as Lee’s. (See STEM stock forecast)
Xometry, Inc. (XMTR)
Now we’ll shift our focus to Xometry, a small cap company that uses AI to power its on-demand parts supply and manufacturing. This company has taken the concept of just-in-time inventory to its logical extension, using proprietary technology to develop a smart marketplace in which manufacturing customers can source parts and assemblies when they are needed, as they are needed. Xometry accomplishes this through a range of processes, including old-fashioned metal stamping and injection molding, as well as more modern techniques like water jet cutting and high-end 3D printing.
The system has multiple benefits for Xometry’s customers, including a reduction in dormant capacity, fewer downtime periods, and a more efficient production line. Customers realize immediate advantages in inventory and warehousing productivity, while Xometry can boast that it is revolutionizing manufacturing and production across various industries such as electronics and semiconductors, aerospace and defense, and medical and dental.
Like Stem above, Xometry has seen hefty share losses so far this year; the stock is down more than 46%. Much of this loss came after the 4Q22 report at the end of February. The company reported a deeper than expected net loss, and revenue and EPS both missed the forecasts.
The 1Q23 results, released this past May 10, showed something of a turnaround. Xometry reported beats at both the top and bottom lines, along with year-over-year growth. The Q1 revenue, of $105.3 million, was up almost 26% y/y and came in $4.5 million ahead of estimates. The EPS figure, a 20-cent loss by non-GAAP measures, was 3 cents better than had been expected, and was an improvement over the 27-cent EPS loss from 1Q22. Xometry reported that its Marketplace revenue grew 35% y/y, to reach $86.7 million.
Looking ahead to Q2, Xometry predicts continued Marketplace success, and guides toward quarterly revenue growth of 14% to 16% y/y, expecting a top line in the range of $109 million to $111 million. While slightly below the consensus of $111.57 million, this guidance was considered sound, and the stock jumped 39% after the Q1 earnings and guidance figures were released.
In the words of Eric Sheridan, another of Goldman’s 5-star analysts, “While the macroeconomic environment could remain a headwind short-term, we believe XMTR made solid progress this quarter in proving out underlying health of the marketplace & framing various growth levers (including international) that could drive momentum on a multi-year timetable. We still view Xometry as a leader in the online B2B marketplace space connecting businesses with manufacturers of industrial parts, addressing a $2tn+ TAM (per the company).”
Quantifying this stance, Sheridan gives XMTR a Buy rating, with a $30 price target that indicates his confidence in ~80% upside on the one-year time frame. (To watch Sheridan’s track record, click here)
What does the rest of the Street think? Looking at the consensus breakdown, opinions from other analysts are more spread out. 5 Buys, 3 Holds and 1 Sell add up to a Moderate Buy consensus. In addition, the $23.63 average price target indicates ~41% upside potential from current levels. (See XMTR stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
