Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 595

Unearthing small and mid-cap gems

  •   Qiao Ma
  •   22 January 2025
  • 1
  •      
  •   

Heading into 2025, some of the most exciting opportunities that we find are in the often-overlooked small and mid-cap space.

Small boats, big sails

As growth investors at Munro Partners, we seek companies that demonstrate sustainable earnings growth over the long run. We are finding compelling opportunities in companies that are small in size today but are positioned to benefit from massive long-term structural growth trends.

We identify these trends as ‘Areas of Interest’ (AOI) – trends that we think represent enduring tailwinds that will shape the global economy for decades to come. Some AOI themes include Security, Climate, High-Performance Computing, and Digital Media & Content.

The small companies that are strategically aligned with these long-term trends have the potential to achieve exceptional growth. Furthermore, the application and deployment of artificial intelligence may give their growth an extra boost.

Take Axon Enterprise as an example (NASDAQ: AXON). Axon is the leading provider of tasers and body cameras to US law enforcement agencies. Its innovative AI-powered software, Draft One, uses the vision captured by the Axon body camera to draft police reports, reducing a mundane task that consumes hours of an officer’s day. The Fort Collins Police Department has claimed a 67% decrease in time spent by officers writing incident reports since deploying the technology. We believe Axon is at the forefront of modernising law enforcement, with its technology poised to expand into private security, defence, and international markets. We see this as just the beginning of a long growth trajectory.


Source: Morningstar.com

RadNet (NASDAQ: RDNT) is another example. This company owns and operates diagnostic imaging centres and is pioneering the use of AI in mammography. It developed an AI algorithm that analyses MRI and CT scans with greater speed and accuracy than human radiologists, detecting cancers up to a year earlier and reducing false positives by nearly 20%. This innovative technology has far-reaching implications, with potential applications across various therapies including lung and prostate cancer detection and vascular scans. Furthermore, wider insurance coverage is expected to drive further adoption and growth. We anticipate RadNet's earnings acceleration to continue for years to come.


Source: Morningstar.com

An additional example is AppLovin (NASDAQ: APP), a founder-led company based in Palo Alto, California. The Company is a mobile app technology company that provides a platform for developers to help them grow, monetise, and optimise their mobile apps. With approximately 1.4 billion daily active users within their mobile gaming ecosystem, AppLovin has one of the largest user bases in the world, allowing them to take share within the mobile gaming advertising ecosystem, where its improved Axon 2.0 AI model is generating superior returns on ad spend for its advertisers. Axon 2.0 has seen a meaningful step change for the company’s financials with accelerated revenue growth, as well as expanding margins and free cashflow. AppLovin is now beginning to test the merits of its Axon 2.0 product outside of mobile gaming, specifically, they are now testing the product for e-commerce advertising. This product remains in beta testing, with initial feedback from advertisers suggesting that the company is gaining a lot of traction, with some sources suggesting their returns are superior to Meta. Advertisers are indicating that if these returns hold, AppLovin could quickly become a large portion of their advertising budgets. This is creating a lot of interest across the industry, with a long tail of advertisers keen to try the platform. We expect, the e-commerce opportunity more than doubles AppLovin's addressable market. The market has become very excited about the e-commerce opportunity, which would be incremental to management’s guidance of 20-30% revenue growth over the next few years.


Source: Morningstar.com

Little attention from Wall Street

A significant valuation gap persists between smaller companies and their mega-cap counterparts, presenting a compelling investment opportunity as we move into 2025 and beyond. This disparity is largely driven by a simple factor: lack of attention.

Consider this: when industry giants like Nvidia and Microsoft release their earnings, they are met with a deluge of analysis, with over 40 analysts dissecting every detail of their performance. In contrast, when the smaller semiconductor or software companies in our portfolio report results, they often receive minimal coverage, with only one or two analysts providing limited commentary.

This lack of attention creates an information inefficiency, where the true value of these smaller companies remains obscured from the broader market. This presents unique and significant opportunities for discerning investors seeking strong returns.

 

Qiao Ma is the Lead Portfolio Manager for the Munro Global Growth Small & Mid Cap Fund and a partner at Munro Partners.

Munro Partners is a fund manager partner of GSFM, a sponsor of Firstlinks. This article is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons.

For more articles and papers from GSFM and partners, click here.

 

RELATED ARTICLES

Every era has its hot stocks. Will AI defy gravity?

Innovation wrap: the amazing world of the latest tech trends

New avenues of growth make 2025 exciting for investors

banner

Most viewed in recent weeks

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Latest Updates

Superannuation

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Investment strategies

The two best ways to maximise dividend income

People often marvel at Warren Buffett now getting 60 cents in annual dividends on every dollar he invested in Coca-Cola 30 years ago. What’s often overlooked are the secrets to how he achieved this phenomenal result.

Taxation

The fetish for lower taxes has gone too far

Since the time of Reagan and Thatcher, most business leaders and investors have clung to a dogmatic belief that lower taxes bring higher profits and economic growth. The truth, as always, is far more complicated than that.

Superannuation

Meg on SMSFs: Winding up market linked pensions with care

Due to recently-introduced rules, many people with old style pensions, also known as legacy pensions, will look to wind them up this year. The temporary amnesty allowing these pensions to be stopped should be navigated with care.

Property

Why our Torrens title property system hasn't been adopted elsewhere

Far from an outdated relic, Torrens title appears to be the revolutionary, cheap, low-risk way to handle property dealings. Here's a look at why this Australian invention from the 1850s hasn't caught on more widely.

Property

DigiCo REIT and the data centre opportunity

Data centres offer compelling growth prospects. But their potential hasn't gone unnoticed, and the DigiCo appears to be buying properties in a seller’s market, resulting in better opportunities being found elsewhere.

Retirement

The $1.2 trillion sea change facing Australian investors

Over the next decade, three million Australians will shift from accumulating wealth to living off it. Those taking part in the great migration need a sound strategy that delivers sustainable income and protection from market bumps.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.