After a brutal 2022, tech stocks are having a nice run in 2023. Year to date, the Nasdaq Composite is up 36%, outpacing the S&P 500's 18% gain. Much of this return has been generated by the largest tech companies in the world, which make up almost half of the companies in the Nasdaq. As a result, there may not be many deals to be had with the more well-known tech names we're all familiar with.
Luckily, there are many smaller, less-known companies that are still attractively priced and have great futures ahead. PubMatic(NASDAQ: PUBM), Endava(NYSE: DAVA), and Sprout Social(NASDAQ: SPT) are all compelling investments. These businesses may be under the radar, but they're worth a closer look.
PubMatic
The most well-known advertising company is The Trade Desk, the leader on the buy side of the programmatic advertising space. PubMatic is trying to become the leader on the sell side of the advertising ecosystem. While The Trade Desk works to help brands find places to advertise, PubMatic works on the other end of the equation helping match those brands with businesses that have ad space to sell.
While revenue growth has been slowing recently, there have been some positive signs. Ad impressions, which are a count of how many digital ads have been shown to a user, increased by 42% year over year to 46.5 trillion in the first quarter of 2023. This is on top of 76% growth from Q1 2021 to Q1 2022.
With the exception of Q1 2023, when the business posted a net loss of $5.9 million, PubMatic has typically been profitable and cash generative. The company generated $5.3 million in free cash flow in Q1 2023, and that should increase moving forward as management expects to reduce its capital expenditures by 60% throughout this year.
Endava
Endava is a consulting company that helps businesses modernize their technology to stay agile and relevant. Whereas a start-up may be digital and cloud-native, an established company will have legacy systems that need to be modernized over time. This is where Endava can help.
Endava has been growing its top line rapidly over the last several years. From fiscal year 2018 through 2022, Endava has grown its revenue at a compound annual growth rate (CAGR) of 32%. It has done this through acquiring new customers, but also by keeping customers year after year. Over that same period, almost 90% of revenue came from customers who were also with the company the year prior.
The company is also growing its largest customers at a rapid pace. At the end of the most recently reported quarter, its third quarter of 2023, Endava had 155 clients with revenue of 1 million pounds, representing a year-over-year increase of 31%. At the same time, Endava is diversifying its customer base. Its top 10 clients represent 33% of total revenue, down from 35% in the prior-year quarter, and 42% at the end of fiscal 2018.
Endava is pursuing a market opportunity it believes will be $3.4 trillion by 2026. With only $946 million in trailing 12-month revenue, there's still a long runway for growth.
Sprout Social
Any brand that wants to keep a connection to younger people needs to have a presence on all social media platforms. Sprout Social helps businesses manage their social media effectively in one place and has been very successful at gaining more customers over time.
Sprout has more than 30,000 customers in more than 100 countries, and in the most recent quarter it reported revenue growth of 31%. This strong growth shouldn't be a surprise, as revenue growth for the previous three full years has been above 35%.
Since Q1 2020, Sprout's annual recurring revenue (ARR) has grown at a CAGR of 35%. Equally impressive has been the growth in annual recurring revenue (ARR) for its larger customers. In Q1 2023, Sprout reported that the number of customers with an ARR of $10,000 or more increased by 33%, while the number of customers with ARR of $50,000 or more grew by 46%. These strong results also led to an increase in guidance for the remainder of 2023. The company now expects its ARR to grow by more than 33% year over year.
One thing for investors to keep an eye on is Sprout's move toward profitability. The company is guiding for non-GAAP earnings per share between $0.07 and $0.08 for 2023. That would be an improvement over 2022's non-GAAP net loss of $0.05.
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Jeff Santoro has positions in Endava Plc, PubMatic, Sprout Social, and The Trade Desk. The Motley Fool has positions in and recommends Endava Plc, PubMatic, Sprout Social, and The Trade Desk. The Motley Fool has a disclosure policy.
