While Big Tech slowed down due to recent security issues from Trump and Microsoft, the US small and medium-cap index Russell 2000 soared. As always, the debate over whether the Big Tech rally is sustainable is once again hot.
AI stocks or small and medium-cap stocks? When you're worried, why not try investing in small and mid-cap tech stocks?
Selection criteria
This is a result of random selection based on basic and quantitative analysis results. The standard for judging the size was less than $30 billion. The stock with the largest market capitalization in the Russell 2000 is Insmed Incorporated (INSM), with a market capitalization of approximately $12.5 billion as of 24/7/24. According to this standard, Applovin (APP), which is worth about $27 billion, is excluded, but it was included at 1/20th of the market cap of Tesla, the smallest among the M7 companies. Data for analysis mainly referred to data from Seeking Alpha and Yahoo Finance.
Source: Celestica
Celestica (NYSE: CLS)
Summary: Looking for small to mid-cap stocks that follow NVIDIA?
Company Introduction
Celestica Inc. (NYSE: CLS) is a global electronics manufacturing services company with two main business segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). It may be easier to understand if you think of Dell's server division. Dell is one of Celestiga's major customers. Its main products include rack-mounted PCs, storage, and network routers, providing solutions related to commercial and server PCs. Major customers include Meta Platforms, IBM, Amazon, Dell Technologies, and Hewlett Packard Enterprise.
Celestica product line, storage, PC, router (Source: Celestica Product Overview)
Why you should invest in this stock
- Increasing demand for AI and data center infrastructure: As the main products are server PCs and storage products, companies such as Nvidia are investing heavily in data center infrastructure. As AI is still considered to be in its beginning stages, demand for data center introduction and replacement is expected to continue.
- Strong growth potential: Demonstrating the growing demand, the Connectivity & Cloud Solutions (CCS) segment grew 38% in the most recent quarter, recording sales of $140 million. The CCS sector's sales share amounts to 65% of the total. Operating margin also increased by 1 point compared to the previous year at 6.2%. Compared to Dell or HPE, which are also dependent on general PC sales, it can be said to be a company with much higher exposure to AI.
- Future growth outlook: Based on the cash secured, we plan to expand production facilities to Thailand and Malaysia.
risk
- Customer Dependency: Due to Celestica's high dependence on major customers, there is a risk of order volatility and inventory distortion. The top 10 customers account for 64% of total sales, and a decline in sales from specific customers can have a significant impact on a company's profits.
- Industry Competition: As the AI and data center infrastructure market grows, more companies are likely to enter the market. This could lead to increased competition and price competition, which could have a negative impact on Celestica's sales growth potential and profitability.
- Financial Risk: Celestica faces financial risks due to high R&D costs and facility investment during its growth process. As a result, there may be short-term changes in profitability.
Source: Fabrinet
Fabrinet(NYSE: FN)
Company Introduction
Fabrinet is a manufacturer of high-precision optical and electronic products. We provide vertically integrated services starting with the optical components we commonly think of, such as lenses, polarizers, and prisms, to wafer-level optical computing components and MEMS packaging. Therefore, we provide services to various markets such as communications, optical communications, automobiles, industrial lasers, and medical devices, and our main products include amplifiers, silicon photonics, network systems, lasers, LIDAR, and sensors. Fabrinet operates production facilities in Thailand, China, Israel, and the United States, and its major customers include Nvidia, Cisco, Lumentum, and Infinera.
Why you should invest in this stock
- Data Communications Division Growth: Fabrinet's data communications segment sales have been growing rapidly in recent years. Sales in the first quarter of 2022 were $88.8 million, but in the first quarter of 2024, they increased by 146% to $242 million. In particular, the partnership with Nvidia has played a big role, and demand for high-speed optical fiber products is rapidly increasing due to increased demand for AI and data centers. As AI becomes more common, demand for communications is expected to increase, and future growth is expected.
- Financial Soundness: Fabrinet has a very stable financial structure, unlike other small-cap tech companies. It has approximately $794 million in cash and only $6.38 million in debt.
risk
- Customer Concentration: Fabrinet's major customers include Cisco, Lumentum, Nvidia, and Infinera, and these four customers account for approximately 56% of total sales. In particular, the partnership with Nvidia is a major growth driver and a point that can add a premium to the stock price. However, excessive dependence on a small number of companies is a factor that can be greatly affected by strategic changes or decrease in demand by these companies.
- Market Volatility: Changes in AI and data center demand may impact Fabrinet's key growth drivers. It is highly dependent on the growth of its data communications segment, so any slowdown in growth in this segment could have a negative impact on its overall performance.
- Global economic uncertainty and geopolitical risk: Global economic uncertainty and geopolitical risk are shared by all companies, but Fabrinet can be seen as being more exposed to geopolitical risk. Fabrinet operates manufacturing lines not only in the United States and Thailand, but also in Israel and China.
Fabrinet Locations (Source: Fabrinet)
- High valuation: It is true that Fabrinet's prospects are good, and its stability and growth potential are good compared to its competitors, but it is somewhat unclear whether the valuation is at the level of PER 30. There is ample room for a higher valuation depending on the Russell 2000 supply and demand, but it must be taken into account that volatility may be high.
(Source: Immersion)
Immersion (Nasdaq : IMMR)
Company Introduction
The company being introduced is the smallest company. Immersion Corporation (Immersion) is a leader in the field of haptic technology and holds approximately 1,000 issued or pending patents worldwide. Haptics is a technology that increases convenience and immersion by transmitting vibration or force to the user when operating a digital device. It is easy to think of “vibration when touched” on a smartphone. The company licenses its technology for the mobile, gaming, and automotive markets, and its major customers include Samsung, Nintendo, Sony, and Meta. It is a company worth looking forward to for the growth of the virtual reality (VR), wearables, and Internet of Things (IoT) markets.
Example of using Immersion haptic technology (Source: Immersion)
Why you should invest in this stock
- Strong Financial Position: Immersion is rich in cash and invested assets and has very low debt. Thanks to this strong financial position, the company is returning capital to shareholders through dividend payments and share repurchase programs.
- Shareholder-Friendly Capital Allocation Policy: Since Eric Singer took office as CEO, the Company has implemented a shareholder-friendly capital allocation policy, including paying a special dividend of $0.10 per share and authorizing a $50 million share repurchase program.
- Future growth potential: Expansion into new markets and new contracts with Meta are expected to have a positive impact on future revenue growth. Additionally, the large investment in BNED is expected to contribute to increasing the company's long-term growth potential.
- Undervalued: Immersion's stock price is currently low, and both its P/E ratio and P/B ratio are attractive. This provides investors with the opportunity to buy value at a low price.
risk
- Stopped R&D investment??: Surprisingly, the company appears to be investing very little in R&D. Depending on the sustainability of the 1,000 patents already secured, it may become a key player in the metaverse era, or it may lose its technological edge in the future depending on the development of its own patents by large customers.
- Barnes & Noble Education, Inc. Investment Risk: It is investing a large amount of approximately $95 million in an education company called BNED.. IMMR's CEO, Eric Singer, is considered competent in capital allocation, but BNED is a company that was on the verge of bankruptcy, so the risks are considerable. The success or failure of investment in this company may affect the stock price.
(Source: Applovin)
AppLovin (NASDAQ : APP)
Company Introduction
AppLovin Corporation (NASDAQ) is an advertising technology company founded in 2012 that connects app developers and advertisers, including mobile games. AppLovin's main revenue streams are divided into two: Software platform and app business. Among these, the software platform is the main growth driver. In particular, it is evaluated as making good use of AI. The company operates an advertising brokerage platform using AI called AXON and has a strong position in the mobile game advertising market.
Why you should invest in this stock
- Strong Growth: Achieving a compound annual growth rate (CAGR) of 47% from 2018 to 2023, with operating cash flow of $1 billion in 2023. Since the introduction of AXON technology, software platform sales have increased by 91%, confirming the synergy of AI utilization.
- Market Expansion Strategy: AppLovin not only has a technological edge in the existing mobile game advertising market through the use of AXON, but is also seeking expansion into new markets such as E-commerce and smart TV markets. Through this, we are pursuing diversification of advertising revenue, and in particular, strengthening our position in the smart TV advertising market through the acquisition of Wurl.
risk
- Changes in App (Play) Store Policy: Changes in Apple and Google's App Store policies can have a direct impact on AppLovin's performance. Already, Performance has been negatively impacted by Apple's tracking policy changes.
- Volatility of the advertising market: As always, advertising spending is the most sensitive part to economic conditions. Expenses may fluctuate depending on economic conditions.
- Intensifying competition: There are strong competitors in the advertising technology market such as Google, Meta, and Unity Software. If these competitors gain technological superiority, AppLovin's growth may slow. In particular, Unity, a graphics engine mainly used in mass-produced game production, is making efforts to expand by acquiring ironSource, an app monetization platform.
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