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.

 

  •   22 January 2025
  • 1
  •      
  •   

RELATED ARTICLES

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

Innovation wrap: the amazing world of the latest tech trends

Not much alpha left in this bet

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

Planning

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved. 

Superannuation

How much super should you have?

Average super balances are one of the most misleading benchmarks. They ignore your goals, spending and future needs, creating a false sense of security. Here is how I calculate exactly where I need to be at every decade.

Retirement

Retiring from work is easy, retiring into life is harder

Most people spend decades planning how to retire. Far fewer plan for what comes next. The biggest retirement challenge isn't always financial, and it often catches even the most prepared retirees completely off guard.

Shares

Right asset class, wrong index: the trap in Australian small caps

Most Australian portfolios are concentrated in large caps, with relatively little exposure to smaller companies. But what if the biggest risk isn't the economy, interest rates or valuations? For many, the risk is hidden in plain sight. 

Property

Are these assets the missing piece in Australian portfolios?

Many investors remain concentrated in shares, cash and property. Despite their popularity among institutional investors, real assets remain underrepresented in many SMSF portfolios. Could they be the missing piece?

Investment strategies

The biggest risk that buy-and-hold investors ignore

Investors spend decades learning how to stay invested, yet few have a plan for getting out. When a financial goal has a hard deadline, a worked example shows why a fixed derisking schedule should outrank buy-and-hold discipline.

Investment strategies

How passive investing is driving the decline of active fund alpha

Why have active managers struggled as passive investing has surged? Research suggests that flows into index funds and ETFs are creating structural headwinds, penalising the stock-picking strategies that once generated alpha.  

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.