7 Best Small-Cap Tech Stocks to Buy

·4 min read

Buy these tech stocks for their growth potential.

The tech sector is once again outperforming the overall market in 2020 as investors continue to go all-in on growth. Unfortunately, after a decade of leading the market rise, tech giants such as Apple (ticker: AAPL), Microsoft (MSFT) and Amazon.com (AMZN) have cracked the $1 trillion market-cap level and may have limited near-term upside. The good news for tech investors is that plenty of high-quality small-cap tech stocks have tremendous long-term growth and upside potential. Here are Bank of America's seven top tech stock picks with market caps less than $10 billion.

Inphi Corp. (IPHI)

Inphi focuses on optical transport and high-speed components for data centers. The work-from-home environment drove 18% quarter-over-quarter and 112% year-over-year data center sales growth for Inphi in the first quarter. Analyst Vivek Arya says cloud demand should carry on through the rest of the year, given booming bandwidth requirements. In the longer term, Arya says Inphi is well-positioned to capitalize on the imminent 5G infrastructure upgrade cycle. He projects at least 30% compound annual earnings per share growth through 2022. Bank of America has a "buy" rating and $150 price target for IPHI stock.

Jabil (JBL)

Jabil is a leading electronics manufacturing services provider. Analyst Ruplu Bhattacharya recently upgraded Jabil and says patient investors will enjoy a boom in demand from the iPhone 5G upgrade cycle, as well as telecom and networking demand associated with 5G networks starting in the second half of 2020. In addition, a recovery in semiconductor capital equipment demand should help boost margins. Finally, Jabil's cloud business is growing, and an uptick in spending by the company's hyperscale customers as the economy recovers is a bullish catalyst. Bank of America has a "buy" rating and $37 price target for JBL stock.

Flex (FLEX)

Flex is an electronics contract manufacturer. Bhattacharya says Flex is doing an excellent job navigating a difficult environment. Second-quarter numbers will be abysmal, but Bhattacharya says the company's portfolio optimization, rising margins and robust free cash flow should help support the stock in the near term. Flex projects that margins for its High Reliability Solutions segment will eventually reach 5% to 7%, but Bhattacharya says that target has upside. Finally, wearables and other end markets offer growth opportunities, and management is committed to creating shareholder value. Bank of America has a "buy" rating and $13 price target for FLEX stock.

Synnex Corp. (SNX)

Roughly 80% of Synnex's 2019 revenue came from its information technology distribution business, and the other 20% came from its business process outsourcing services. Bhattacharya says travel restrictions have been a headwind for Synnex in 2020, but longer-term demand remains strong. In addition, the market doesn't seem to fully appreciate the company's diverse income streams and significant free cash flow. Bhattacharya says Synnex's decision to suspend its dividend was the right call, and the company's debt covenants are not a problem. Bank of America has a "buy" rating and $140 price target for SNX stock.

Avalara (AVLR)

Avalara provides cloud-based sales and tax compliance software. Analyst Brad Sills says solid subscription and returns revenue in the first quarter were somewhat overshadowed by the company's fiscal 2020 guidance cut. Because half the company's volumes are now in the e-commerce space, Avalara is likely to maintain healthy net revenue retention levels throughout the economic downturn, Sills says. He says Avalara will continue to gain market share in the $10 billion sales/indirect tax market, given the company's first-mover advantage in cloud services. Bank of America has a "buy" rating and $120 price target for AVLR stock.

Proofpoint (PFPT)

Proofpoint is a cybersecurity company specializing in email security, archiving and social media. Analyst Daniel Bartus says 98% of Proofpoint's revenue is stable and recurring, and the vast majority of its business is tied to critical email security. Customers are unlikely to cut back on email security, even if budgets get squeezed in the near term. Bartus says the company's bundling efforts are paying off as well. Proofpoint is well-established as the leader in email security, and he says it will likely gain market share over time. Bank of America has a "buy" rating and $140 price target for PFPT stock.

Carvana Co. (CVNA)

Carvana is a digital used-car dealership that enables buyers to purchase online and have automobiles delivered to their homes. Management commentary says sales have recovered from a 30% year-over-year decline in mid-March to growth of between 20% and 30% in recent weeks. Analyst Nat Schindler says the health crisis could permanently shift auto demand online, increasing Carvana's market share. A recent survey from CarGurus found that the percentage of car buyers willing to purchase online has increased from 32% before the outbreak to 61% today. Bank of America has a "buy" rating and $100 price target for CVNA stock.

Small-cap tech stocks worth buying:

-- Inphi Corp. (IPHI)

-- Jabil (JBL)

-- Flex (FLEX)

-- Synnex Corp. (SNX)

-- Avalara (AVLR)

-- Proofpoint (PFPT)

-- Carvana Co. (CVNA)

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