Some tech stocks give investors the opportunity to earn meaningful long-term returns. These stocks can outperform the market over several years due to their compelling opportunities and massive runways.
After a slow start to the year, many major indices like the Nasdaq 100 and S&P 500 are up by several percentage points year to date (YTD). Rallies in tech stocks have generated plenty of buzz to start 2024, and many of them are up YTD.
Investors looking to compound their returns at a faster pace than the market may want to consider these three stocks.
Direct Digital Holdings (DRCT)
Direct Digital Holdings (NASDAQ:DRCT) is an up-and-coming programmatic advertising company with buy-side and sell-side advertising businesses.
The stock has been volatile since its IPO but was ultimately unprofitable for investors who got in at the IPO. All of that changed in November when the stock more than quintupled in less than two months. Shares pulled back from their all-time highs but appear to be rallying once more.
That type of price movement warrants a closer look at the valuation and financials. A deeper dive reveals an undervalued stock growing at a massive pace. The micro-cap currently trades at a 14-forward P/E ratio.
That’s a good valuation for a growing company in programmatic advertising. However, the company’s growth is booming and can lead to a higher price in the future. Results from the third quarter will demonstrate the opportunity in this stock.
Revenue grew at 129% year over year (YOY) during that quarter and reached $59.5 million. Net income more than quadrupled during that period. Full-year guidance suggests revenue will more than double YOY.
Since DRCT reported revenue growth under 100% YOY for the first and second quarters, it implies Q4 will feature 100%+ YOY revenue growth. While the buy-side component drives double-digit YOY revenue growth, the company’s sell-side business is doing most of the work. That segment grew by 174% YOY.
Perion (PERI)
Perion (NASDAQ:PERI) is another small advertising company that is overlooked. The stock has a $1.4 billion market cap and a 10-forward P/E ratio. Despite its stock price down over the past year, Perion continues to gain market share and grow at a faster rate than many large advertising companies.
Perion taps into several popular advertising channels and recently introduced Waveform Audio Voice Engine ads. These AI-generated voice ads can help Perion “create entirely new categories” that will give the corporation a competitive advantage.
Bears will point to the fact that a contract is set to expire with Microsoft (NASDAQ:MSFT) this year. That contract allows Perion to generate almost half of its revenue from Bing. If the contract falls through, Perion stands to lose considerable revenue.
However, the firm has expressed confidence that the contract will get renewed. Microsoft and Perion have been working together since 2010, and leadership has talked about the contract as if its renewal is almost certain.
Therefore, investors will have to wait patiently for this confirmation. The contract was extended in October 2017 and then in November 2020 once the previous contract reached its deadline. The two corporations went from a 3-year contract to a 4-year contract, which is a good sign.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is the largest advertising company. Many people use its search engine to find relevant content. While inputting search queries, users come across advertisements.
The advertising segment is Alphabet’s main revenue segment that contributed to a 55% stock gain over the past year. The Google Advertising network contributed to 77.7% of the company’s total revenue in the third quarter.
Google Cloud is a notable segment under the Alphabet umbrella that recently became profitable and had a higher growth rate than the company’s advertising business. Also, Alphabet has several smaller ventures, but advertising remains the key revenue driver.
Alphabet can tap into new opportunities with AI and quantum computing. While investors wait for these ventures to expand, they still end up with a highly profitable enterprise. Alphabet’s net profit margin came in at over 25% in the third quarter. The company usually posts a net profit margin above 20%.
On this date of publication, Marc Guberti held long positions in DRCT and PERI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
