Small-cap stocks have higher growth potential their mid- or large-cap stocks. Stingray Digital Group (TSX:RAY.A)(TSX:RAY.B) and Biosyent Inc. (TSXV:RX) are two small-cap stocks that are worth exploring.
Stingray Digital Group
Stingray is a leading provider of multiplatform music and video services and digital experiences. It has a wide range of customers, including pay TV operators, commercial establishments, over-the-top content providers, mobile operators, and consumers.
Its services include audio television channels, premium television channels, 4000 pixels ultra-high-definition television channels, karaoke products, digital signage, in-store music, and music apps. Stingray reaches 400 million subscribers or users in 156 countries and its mobile apps have been downloaded over 100 million times.
Stingray is clearly in a growth phase, as it has been making acquisitions to increase its offerings and expand its capabilities. For example, in fiscal year 2018 that ended in March 2018, Stingray completed five acquisitions by investing a total of $44.9 million.
These acquisitions helped significantly in boosting Stingray’s revenue, which increased by 25.1% to $127 million in fiscal 2018, while Stingray’s organic growth was 9%. Revenue growth translated to strong adjusted EBITDA growth of 22.6% to $41.5 million and adjusted free cash flow growth of 25.2% to $33.2 million.
This fiscal year Stingray has continued to expand and grow its business by acquiring Newfoundland Capital Corporation and landing a global five-year deal to develop and market The Voice singing app, which is expected to launch in December 2018.
Stingray also bought a minority stake in Nextologies to gain access to Nextologies’s innovative and secure signal IP distribution network at competitive rates. Nextologies provides technological solutions for broadcasters. This month Stingray bought Toronto-based Novramedia, which designs and develops digital media solutions.
Stingray generates about 86% of recurring revenue, which translates into stable cash flow, to support its dividend. This month Stingray increased its quarterly dividend, which is 20% higher than it was a year ago. Its dividend is sustainable with a payout ratio of about 37% on a forward basis.
Biosyent in-licenses or acquires pharmaceutical and healthcare products to sell primarily in Canada. These are products that are known to be safe and effective in other places, which substantially reduces costs and risk compared to developing new products.
Biosyent is highly profitable. Its net revenue increased 10% in the first half of 2018. Its net income (before and after tax both) increased 13%. Its EBITDA increased 11% to $3.57 million. Biosyent should be applauded for not having any long-term debt on its balance sheet.
If you’re looking for a small-cap with strong growth potential, consider Stingray, which is expanding its business via strategic acquisitions and planning to roughly double its employees over the next five years or so.
If you’re looking for a highly profitable and low-risk small-cap stock, consider averaging into Biosyent now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kay Ng owns shares of Stingray and Biosyent.