Micro-cap equities can offer hidden opportunities. Stocks in this category receive less coverage and may not surge as much on good earnings compared to a Magnificent Seven stock. Venturing into this part of the market has risks. You’ll have to do a lot of the research yourself, and it’s harder to find any commentary on the stocks. Some stocks are micro caps because they continue to lose revenue and market share. However, Direct Digital Holdings (NASDAQ:DRCT) is one that can deliver multi-bagger returns.
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Some investors have noticed this company, but even then, its market cap is under $200 million. I am bullish on this stock due to high revenue growth and expanding profit margins.
What Is Direct Digital Holdings?
Direct Digital Holdings is a programmatic advertising company that offers buy-side advertising and sell-side advertising. Buy-side advertising platforms are also referred to as demand-side platforms, while sell-side advertising platforms are also referred to as supply-side platforms.
Buy-side platforms automate digital ad purchases. They ensure businesses get their messages shown to the right people at the right time and in the right location. Businesses use buy-side platforms to get targeted ad placements through an automated process.
Sell-side platforms build up the necessary inventory to fulfill buy-side order requests. Businesses that generate money from advertisements and sponsored placements can use sell-side platforms to get advertising clients. Sell-side platforms automate this process so companies with ad placements get them filled.
Direct Digital Holdings has a buy-side platform and a sell-side platform. Revenue for the AdTech company’s Buy-Side Advertising segment grew by 10% year-over-year in Q3 2023. While a 10% growth rate is respectable, most of the stock’s excitement comes from its Sell-Side Advertising segment.
The micro-cap company reported 174% year-over-year revenue growth for its Sell-Side advertising segment. The company is entering several partnerships, including one with Amazon (NASDAQ:AMZN), so it can sell more ad placements for its supply-side platform. The Buy-Side segment also benefits from several partnerships, but the Sell-Side platform is the main winner and the engine for future growth.
Why Are Investors Suddenly Paying Attention to This Stock?
Direct Digital Holdings has a history of gaining value within a short amount of time and giving up those gains. Shares more than doubled from the end of December 2022 to the start of February 2023. The stock gave up all of those gains by mid-April.
Investors now find themselves in a similar situation where the stock has gained over 300% from the start of November 2023 to now. Shares are also down by more than 16% over the past month.
One significant development for the firm is its net income growth. Q3-2022 net income came in at $0.8 million, while Q3-2023 net income came in at $3.4 million. That translated into a meaningful 80% year-over-year increase in the company’s net profit margin (5.6% profit margin for the quarter). A higher net income will result in a lower P/E ratio. That’s why DRCT has a 34.2 P/E ratio and a 13.8 forward P/E ratio. Not every investor may like the stock’s current P/E ratio, but the forward P/E ratio looks more enticing.
Nonetheless, Direct Digital Holdings will have to demonstrate that it can sustain high net income growth. The company’s net income declined year-over-year in Q2 2023 due to “higher operating expenses associated with investments in growth as well as operating as a public company and higher interest expense.”
However, interest expenses should decrease as the Fed reduces interest rates. The company bounced back nicely in Q3, and if it posts good net income growth in Q4, the stock can gain more momentum. The company grew net income by roughly 166% in Q4 2022, which is a good sign of what may happen in Q4 2023.
Investors may also notice that the company’s revenue has been accelerating. A 129% year-over-year growth rate in the third quarter exceeds the 98% revenue growth rate for the nine months ended September 30. Buy-Side Advertising revenue growth decelerated, but the main segment is growing at a faster rate.
The growth caught many investors by surprise. In the second quarter, management offered guidance in the range of $125 million to $130 million, which suggested a 43% year-over-year increase at the midpoint. Then, the company raised its guidance to $170 million to $190 million in the following quarter. The midpoint implies a 101% year-over-year growth rate.
Notably, Direct Digital Holdings works with over 200 clients, and some of them are big names. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), JPMorgan (NYSE:JPM), and Disney (NYSE:DIS) are some of the firm’s Sell-Side customers. The Buy-Side roster also has impressive clients.
Is DRCT Stock a Buy, According to Analysts?
On TipRanks, DRCT stock comes in as a Moderate Buy based on two Buys assigned by analysts in the past three months. The average DRCT stock price target is $11.25, implying 0.9% upside potential.
The Bottom Line on Direct Digital Holdings Stock
Direct Digital Holdings is a small AdTech company that has the potential to be a multi-bagger stock. The company’s stock depends on its supply-side platform, while any growth acceleration in its demand-side platform would be a pleasant surprise.
It’s reasonable to feel confident that high revenue growth will continue for several quarters or years. It’s accelerating and can help the stock perform well. However, investors should pay just as much attention to the stock’s net income growth rate. DRCT’s third-quarter report showcased 313% year-over-year net income growth. If the company’s net income can continue to grow at a high rate, its P/E ratio will get much lower and make the stock more desirable.
Overall, Direct Digital Holdings is in its early innings, and investors may want to keep this stock on their watchlists.
