In a market at all-time highs, is the downside of these small-cap companies already accounted for, and is now the time to invest in order to gain big?
Aug. 24, 2020
These companies all operate in industries with significant market opportunities, and with small market caps, there is room to grow. Small-cap companies typically grow quicker than large-cap companies as it is often easier to grow revenue at this early stage. However, the one downside to small-cap companies is that the stock is often more volatile than large-cap companies.
2U (NASDAQ: TWOU) operates in an industry that is ripe for disruption, education. 2U has 75 University Partners, with over 245,000 students enrolled and a client base that includes famous names such as Harvard and Cambridge. 2U then takes a cut of the tuition fees.
The impact of COVID-19 has caused a shift “toward online and away from campus space programs” according to co-founder and CEO Christopher Paucek. Online program management is a $7 billion market opportunity, and 2U is the leader in this space. 2U also addresses a societal need to reduce the cost of tuition.
In Q2 of 2020, revenue increased 35% to $182.7 million, with organic growth at 18%. 2U has also increased its free- cash flow over the previous three quarters and is heading towards positive free- cash flow. 2U is still operating at a loss with a net loss of $66.2 million in the quarter and a cash balance of $213 million.
One of the risks of investing in this company is that universities may decide to create their own offerings and cut ties with 2U. In 2019, the stock was hit due to these fears, forcing management to shift its focus to shorter courses that are currently seeing record enrollment rather than multi-year graduate programs.
Eventbrite (NYSE: EB) has a mission to “bring the world together through live experiences,” but with many live events canceled or postponed, the stock has been hit hard. Eventbrite targets small and medium-size events that are too small for larger companies such as Live Nation and Ticketmaster. Since going public, Eventbrite has struggled, lagging the S&P 500.
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Eventbrite has stated that it does not see the recovery of live events to be “quick nor linear” which may be a worrying sign for investors. However, total ticket volume is 53% of the year previously, with tickets to online events increasing thirty fold year-over-year. Ticket sales have also increased each month in the last quarter although they are down 82% year-over-year. The business strength can be seen with 98% of new creators signing up organically in 2019.
In Q2 of 2020, revenue came in roughly one-tenth of the year previously at $8.4 million. Net loss for the quarter more than doubled from $14.8 million to $38.6 million from the same period last year. In Q2, Eventbrite issued $150 million in senior convertible notes to strengthen its financial position. Eventbrite also acted swiftly, implementing cost-cutting measures to save $100 million by Q4 2020 and have $546.9 million in cash and cash equivalents on the balance sheet.
Small and medium-sized events will likely resume quicker than large events which should benefit Eventbrite. The strong cash position and cost-cutting measure should enable Eventbrite to weather the storm and profit when many live events return.
iRobot (NASDAQ: IRBT) is a technology company that builds robots for consumers led by founder and CEO Colin Angle.
iRobot has a market cap of just over $2 billion, and in recent years tariffs have been implemented due to the trade war with China weighing on the stock price. However, management took steps to soften the blow by moving to manufacture outside of China.
iRobot has also collaborated with Google to create a smart home. The Roomba vacuums made by iRobot map the floors, and this data is valuable for both companies. Perhaps this venture could make iRobot a prime acquisition target.
iRobot, unlike the other two companies, is profitable and, in 2019, generated $1.2 billion in revenue and is expected to match this in 2020. iRobot saw a 43% growth in its premium robots, which led to an 8% increase year-over-year in revenue to $280 million. Operating profit came in at $41.1 million due to higher revenue and increased margins. Cash, cash equivalents, and short term investments were $242.3 million, and the company has no debt.
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