Small-cap Tech Stock Picks from Fundamental Research

Looking back over the year so far, the small-cap tech sector has seen a number of stocks soar. 

While the Russell 2000 Index has witnessed over 15 percent growth, following behind the tech-focused Nasdaq Composite Index rising over 22 percent year-to-date, a number of tech small-cap stocks have increased as much as sixfold.

Leading up to the Extraordinary Futures Conference on September 22 and 23 in Vancouver, British Columbia, the Investing News Network (INN) spoke with Siddharth Rajeev, vice president and head of research at Fundamental Research, whose firm will be attending the conference.

INN spoke with Rajeev about his top picks in the small-cap tech industry. He discusses company management, intrinsic valuations and why he sees a fourfold uptick in revenue into the end of 2019 for his top tech pick. Read on to learn more about what he had to say. The interview has been edited for clarity and brevity.

FRC (www.researchfrc.com) provides fee-based coverage to the companies mentioned in the article.

INN: Can you tell me more about some of the tech companies you’re seeing that have the strongest fundamentals going into the second half of 2019 and into next year?

SR: We cover a number of companies in the tech sector. The best performer in the last 12 months is an ASX listed company called iSignthis (ASX:ISX). This stock, we launched coverage back in December 2018 at AU$0.16. It’s up over 600 percent since then. Its market cap is over AU$1 billion.

It does payment processing and customer identification, and it gets revenues from a percentage of transactions that it does. So every month it comes up with how many transactions it has done the previous month, and that has been going up exponentially, and that is why the stock has done extremely well.

We think that in the second half of 2019, it will have about AU$25 million in revenue versus the first half of 2019, with revenues of AU$6 million.

INN: Interesting.

SR: The second company is Kidoz (TSXV:KIDZ). It’s a Vancouver-based company, market cap of about C$55 million to 60 million. This company has been around for quite some time, but recently in the last 12 months, it has made one acquisition and has a new story to say now. The company’s chairman is Tarnie Williams, who used to be the president of EA (NASDAQ:EA) Canada in the ’90s. What Kidoz does is it has a network of children’s games and learning platforms. It’s pretty much like Netflix (NASDAQ:NFLX) for kids, where children can go and sign up and login and can play and also have learning apps.

The beauty of this platform is that it’s compliant for advertising to children. Recently, there has been a lot of news on how the bigger firms like YouTube have been fined from regulators for not being compliant. Having a network that is compliant is very attractive because a lot of these brands are looking for such networks to advertise. Kidoz already attracts a number of multinational brands. It reported its most recent financial which show revenues of over C$3 million. It is still in their ramp up stage, but its platform I think is solid.

The third one is Bragg Gaming (TSXV:BRAG) this company is based in London, UK, but  are listed in Canada. It is a relatively new company, with a brand new management team. The CEO used to be in the management team of Full Tilt Poker, one of the top poker sites in the world. He took over Bragg in the last 12 months.

The main asset of this company is a technology platform. Similar to Kidoz, this one is a Netflix for gaming, betting websites and betting platforms and things like that. It has a number of games and betting portals within the network. Not only that, it also gives all infrastructure necessary for a new operator to get into the space. This company had about C$8 million in revenues in the first six months of 2019, and we will be launching coverage on the company soon. We did an introductory note on the company six months ago.

INN: In terms of the core metrics or variables that you are looking for in small-cap stocks, what would they typically be?

SR: Most of the companies we cover are under C$100 million, so micro-cap stocks. As with any other industry, the first thing we do is look at management. We track what they have done in the past, including success stories and also red flags and that’s how we start our due diligence.

Second, we spend our time interviewing them, getting to understand their vision for their company. That also allows us to see if they have skin in the game, in terms if they have enough share ownership in the company. After management, we look at the company’s fundamentals and how they fit within their particular industry, and then we do our internal valuation, which will probably be a discounted cash flow model and a comparable valuation. We then come up with creating a fair value estimate and then a buy, sell or hold recommendation.

INN: With Wi2Wi (TSXV:YTY) you stated a fair value that was triple the amount of its existing trading price. Can you tell me more about your analysis on this? I see that the company has no debt and C$2.39 million in cash. 

SR: This company is a US-based company again listed on the TSXV. There are two lines of divisions. One is a boring cash-heavy kind of business, where they make timing devices and controllers which are used in any equipment that has a timing device attached to it. Companies would have to buy these off-the shelf products from Wi2Wi. It also has partnerships with a number of multinational firms.

The other division has a blue-sky potential, where it is trying to get into the IoT business. It has a platform in place that allows new entrants into the IoT space to use that Wi2Wi platform to get wireless capabilities off of anything that it is trying to do. For example, if you wanted to get into IoT and make your equipment wireless, you would approach Wi2Wi and buy its products. This is a brand new division and it is trying to get traction there.

What we did is we valued both divisions separately, looking at its) expected revenues from both divisions and we came up with a discounted cash flow model of C$0.30 per share, and that’s how we came up with the fair value estimate. That’s assuming the company follows through with what we have forecasted.

INN: I also saw that with Siyata Mobile (TSXV:SIM) it has announced partnerships with US automobile manufacturers and ridesharing companies in the past few weeks. Fundamental Research also covers it, and I was interested to hear more about your position on it.

SR: Siyata is another company we cover, and it is more on the hardware side. Recently it entered an agreement to get into the US market and that’s a huge development for the company, especially because the company has been primarily Israel-focused, that’s where the management is. Entering the US with its product portfolio and with all these new agreements in place, we expected a significant ramp-up in revenues.

INN: It was interesting to see. Speaking of revenues models, in the sports betting space, Newgioco (OTC Pink:NWGI), also have a fair value price of about double of what it is trading now. It seems as if generating solid revenue structures within this industry is a challenge.

SR: Naturally. Newgioco is a primarily Italian operation and it has been around for some time, and it has gained good traction in Italy. It is a highly competitive and saturated business in Italy. Its plan now is to venture out and move into the US, which has recently made gaming legal. And what it wants to do is provide the infrastructure and platform to new betting companies to start a business. Newgioco has the infrastructure to get it set up.

INN: The US federal reserve cut their interest rates on Wednesday (September 18) for the second time in the past few months, and appears to be adopting a new monetary policy model. How does this impact your investing approach in the small-cap sector?

SR: In terms of the overall sectors that we cover, especially in technology, I don’t think it plays a critical role. But in other sectors like mining, oil and gas and resource-based sectors, where most commodities are priced in US dollars, we think the recent developments by the fed, and also what’s happening in the macro environment, weighs heavily.

What generally happens is a lower interest rate in the US will reflect negatively on the US dollar and that should positively impact the commodities sector as a whole. I think the rate cut should help gold especially because of the negative correlation, and that should be the same for other commodities as well. For the tech sector, I don’t see any significant impact.

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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.