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These 2 Small-Cap Tech Stocks Are Grossly Undervalued, Says Needham

Markets are volatile this month, with the magnitude of the shifts most pronounced in the tech-heavy NASDAQ. That index fell 7.5% from its peak – reached on September 2 – a slide pronounced enough to have investors questioning whether this is just a correction, or a true reversal of the bull market we saw through the summer. But in recent sessions, the index has been gaining; it entered the weekend on a high note, having added 2.3%.

The fast rise in the NASDAQ during the summer was no fluke. It was based on the real contributions that tech companies are making to the economy and our lives. From the 5G rollout, to improvements in semiconductor chips, to the expansion of IoT and smart device capabilities – tech is everywhere, and it’s growing fast. The best part is, you don’t need to buy into the tech giants to take part. There are plenty of lower cost tech stocks out there with clear paths forward – sometimes, even paths to triple-digit share appreciation.

Investment banking firm Needham, which earns a top spot on TipRanks' list of Top Performing Research Firms, has pointed out two such stocks. Using TipRanks’ Stock Comparison tool, we were able to evaluate these stock picks alongside each other to get a sense of what the analyst community has to say.

Applied Optoelectronics (AAOI)

Applied Optoelectronics is a leader in the fiber-optic cable market, providing high-end networking cables and ancillary equipment for the telecommunications, fiber-to-the-home, cable tv, and internet data center markets. These are major markets, with varying needs – and plenty of demand.

AO’s revenues reflect the high demand. The company reported $65.2 million in Q2, up 61% from the previous quarter and 50% year-over-year. Margins have been fluctuating, but came in at 21% for Q2. The company showed a 40-cent per share net loss for the quarter, but that was a 33% improvement sequentially.

Alex Henderson, a 5-star analyst with Needham, is impressed with Applied Optoelectronics’ results, and says so bluntly. While acknowledging some concern about margins, Henderson writes, “AOI posted a huge beat and an even bigger 3Q guide with trends that appears to be accelerating into the fourth quarter and into CY21. The CATV business, Telecom 5G chips, and Data Center 100G products all delivered way ahead of expectations… The combination of improved volumes of 100G, ramping CPRI 25G chip sales, rebounding CATV Revenues provide upside potential to Revenues, improving Gross Margins and a clearer path to Cash Flow and EPS profitability."

With such bullish comments, it’s no wonder that Henderson rates AAOI shares a Buy, nor that his $22 price target implies a 105% upside for the next 12 months. (To watch Henderson’s track record, click here)

While Henderson is bullish, Wall Street is more cautious. The analyst consensus rating on AAOI is a Hold, based on 7 recent reviews breaking down to 1 Buy, 4 Holds, and 2 Sells. Shares are selling for $10.73 and the average price target of $16.43 suggests a 55% one-year upside potential. (See AAOI stock analysis on TipRanks)

Viomi Technology Company (VIOT)

Next up is a Chinese tech firm, Viomi. This is a holding company, controlling a network of holding companies in the IoT sector. Viomi’s products include ‘smart home’ enabled devices, from fans and refrigerators to water heaters and washing machines. The company’s subsidiaries develop and market the devices to a domestic Chinese customer base – and with an urban population of 831 million and growing in size and wealth, that customer base is huge.

Like most countries, China saw an economic slowdown in 1H20 due to the coronavirus pandemic. Viomi, whose revenues and earnings had been increasing in 2019, saw both slip in the first half of this year. In Q2, revenues were at US$238.4 million. That was way down from the $1.74 billion recorded in 4Q19. EPS, which fell from 20 cents to 6 cents in Q1, was up slightly to 8 cents in Q2.

Even though the financial results were iffy, Viomi reported that customer growth remained steady. For the second quarter, the company reported cumulative household reach at 4.2 million. This was up from 3.7 million in Q1, and 2.3 million in 2Q19. And, Viomi is seeing repeat customers – the company reports that 19% of household users have at least two connected devices, compared to 16% one year ago.

Reviewing Viomi for Needham, analyst Vincent Yu believes the company has a fairly standard pathway to retailer success.

“With the introduction of new product lines such as smart TVs, and air conditioners, we believe Viomi has hit a milestone in terms of category expansion. We expect to see the introduction of new SKUs with higher ASPs, and roll-backs in discounts for newly launched product categories,” the analyst opined. "We think Viomi's gross margin was in-line with industry trends during 1H20. The home appliance industry as a whole experienced a material headwind due to Covid 19 [...] We believe the demand recovery for the industry and consumer demand that started in June will boost the gross margin in 2H20."

Yu’s Buy rating here comes with a price target of $12.50. This suggests a 117% one-year upside potential for the stock, which is currently selling for $5.76 per share. (To watch Yu’s track record, click here)

Overall, Viomi is considered a “Moderate Buy” on Wall Street, with one Buy and one Hold rating from analysts. The consensus price target of $9.40 shows a 63% upside from current levels. (See VIOT stock analysis on TipRanks)

To find good tech ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.

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