The technology sector is known to generate millionaire profits for patient investors. However, the world’s top tech stocks — sort of Nvidia, Microsoftand Apple — already worth trillions of dollars and may have less upside potential than smaller, lesser-known sector stocks.
So today, I’m going to focus on three undervalued small and mid-cap stocks that could produce millionaire profits over the next few decades: Reddit (NYSE: RDDT), Fiverr International (NYSE: FVRR)and DigitalOcean (NYSE: DOCN).
1. Reddit
Reddit’s stock price has risen nearly 70% since its public debut in March. Social media company impresses investors with strong growth rate and artificial intelligence (AI) shares new data with OpenAI and AlphabetGoogle it. In 2023, Reddit’s revenue rose 21% due to a decline in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). By 2024, analysts expect earnings to grow another 36% as adjusted EBITDA turns positive.
Reddit’s growth accelerated as it gained more users and the macro headwinds for the advertising market disappeared. In the first quarter of 2024, revenue grew 48% year-over-year, daily active unique users grew 37% to 82.7 million, and adjusted EBITDA was positive. Reddit has carved out a defensible niche in the crowded social media market with user-directed discussion forums, and certain major events – including the COVID-19 pandemic, the WallStreetBets meme stock phenomenon, the Russia-Ukraine War, the Israel-Hamas War, and various elections AS — brings more users to the platform.
Analysts expect Reddit’s revenue and adjusted EBITDA to rise 22% and 91%, respectively, by 2025. Based on these estimates, Reddit stock still looks reasonably valued at 4 times next year’s sales and 22 times adjusted EBITDA. If it succeeds in expanding its business and expanding its moat over the next few years, it could generate a millionaire profit.
2. Fiverr International
Fiverr went public at $21 per share five years ago, and its stock hit an all-time high of $323.10 in February 2021 before falling all the way back to around $22. The gig economy market initially grew rapidly during the pandemic, but lost momentum as macro headwinds caused companies to hire fewer freelancers. Some investors also worry that new generative AI applications could replace many freelance positions.
Fiverr’s revenue will only grow 7% in 2023, compared to 13% growth in 2022 and 57% growth in 2023. But on the bright side, adjusted EBITDA more than doubled to $59 million as take rates increased throughout the year . The improvement suggests that it is merely experiencing a cyclical slowdown in a challenging macroeconomic environment rather than facing the existential threat of new AI algorithms. It confirms that the growth of the AI ​​market will generate long-term tailwinds for its business as more companies open freelance positions for AI-related fields.
By 2024, analysts expect Fiverr’s revenue and adjusted EBITDA to grow by 6% and 20%, respectively. But by 2025, they expect revenue and adjusted EBITDA to grow by 11% and 24%, respectively, as the macro environment stabilizes. That’s a solid growth rate for a stock that’s traded at just 2 times its sales this year. If the gig economy warms up, Fiverr’s growth could reaccelerate as its stock is revalued as growth plays again. It can eventually generate multibagger results as it happens.
3. DigitalOcean
DigitalOcean is a cloud infrastructure company that carves out smaller “droplets” of servers for smaller customers at lower prices. It also added GPU-powered AI processing capabilities to its servers by acquiring startup Paperspace last year. These services make a great alternative to larger cloud platforms, which primarily serve large enterprise customers.
DigitalOcean went public in March 2021 at $47 per share, and its stock nearly tripled to a high of $130.26 in November 2021 before retreating to $34. Like many other cloud companies, growth has slowed as macro headwinds have caused many companies to rein in spending. Its revenue will only grow 20% in 2023, compared to 34% growth in 2022 and 35% growth in 2021. Analysts expect adjusted revenue and EBITDA to grow only 11% and 5%, respectively, in 2024.
The decline was disappointing, but it still gained new customers and its adjusted EBITDA margin grew significantly. Therefore, growth can quickly stabilize again as the macro environment improves. For 2025, analysts expect adjusted earnings and EBITDA to grow 13% and 14%, respectively, as near-term headwinds fade.
That’s a solid growth rate for a stock that traded 4 times this year at 14 times adjusted EBITDA. If growth accelerates again and prices rise, it could generate millionaire profits over the next few decades.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has a position in Apple. The Motley Fool has positions and recommends Alphabet, Apple, DigitalOcean, Fiverr International, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The Top 3 Tech Stocks That Can Make You a Millionaire was originally published by The Motley Fool
