Some of the biggest companies in the world started small. And that's why investors should pay attention to cheap stocks with significant growth potential over the long term. Let's explore the reasons why mobile game developer Glu Mobile (GLUU) and software developer Palantir Technologies (PLTR -3.72%) fit the bill and could make great additions to your investment portfolio.
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Glu Mobile: Pivoting to e-commerce
Glu Mobile is a leading mobile game developer that uses a freemium business model. Most games are free to play, but players have the option of purchasing cosmetic upgrades and expanded functionality. This lucrative strategy helped send Glu Mobile's revenue up 40% to $133.3 in the second quarter, and the company can power continued growth by pivoting to real-world e-commerce.
In September, Glu Mobile launched Design Home Inspired, a new mobile e-commerce store available within an already-existing game called Design Home that allows players to decorate simulated living rooms. Design Home boasts over 90 million downloads, according to Glu Mobile's president Nick Earl, and the addition of this new, real-world store could potentially reach a large number of highly-targeted consumers who are already interested in home decor.
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The store will feature cost savings and home delivery of items such as pillows, mirrors, and art. Real-world purchases will also give the player a virtual currency called 'Diamonds' to spend in the game -- potentially further driving engagement.
Management has not provided any color on the revenue and profit implications of their new e-commerce strategy, but if the idea works out, the possibilities are substantial. Glu Mobile has other games that are well-suited for e-commerce -- including Covet Fashion, which could potentially incorporate an apparel store, and Diner Dash, a restaurant management game that may synergize with real-world food delivery. Glu Mobile has a market cap of $1.35 billion, which makes it a small cap stock, and the e-commerce opportunity could potentially boost shares higher.
Palantir Technologies: A massive opportunity in the private sector
Palantir Technologies is a software-as-a-service (SaaS) company that focuses on providing big data solutions to public and private sector clients. The company serves high-profile government agencies such as the FBI and CIA (among others), which make up around 47% of its revenue. It looks poised for long term growth because of its large market opportunity and pivot towards attracting more commercial clients.
Analytics company Market and Markets estimates that the global big data and law enforcement software markets will expand at compound annual growth rates (CAGRs) of 10.6% until 2025 and 9.3% until 2023, respectively due to rising levels of digitization in the economy. Palantir's data analysts software systems are positioned to capture some of this opportunity because they help clients identify patterns deep within datasets to help guide their decision making. Palantir offers a government-focused system called Gotham and its commercial counterpart, Foundry. It estimates a total addressable market of $119 billion for these systems.
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Palantir's market cap of $15.3 billion already puts it firmly in large-cap territory. But the stock has ample room for continued growth as the big data industry expands and it improves in scale, which could lead to consistent profits for investors.
Management expects revenue to grow 42% to $1.06 billion leading to a non-GAAP operating income of $121 million in 2020 -- followed by revenue growth of over 30% in 2021. Attracting more commercial clients will be pivotal to reaching these growth projections and justifying Palantir's rich valuation of roughly 15 times projected 2020 sales. The company's success with discerning government agencies could help boost its transition to the private sector by demonstrating the quality of its software.
Two small stocks with big potential
Glu Mobile and Palantir technologies are both growth stocks that trade under $10, but that's where most of the similarities end. Palantir's rich valuation suggests the market is optimistic about its future performance (and has already priced in significant growth), while Glu Mobile's low valuation suggests the opposite.
I think the market may be underestimating the potential of Glu Mobile's new e-commerce strategy, making the gaming stock the better pick for value-conscious investors. Palantir is better for investors who would rather pay a premium for what looks to be a more established company with very high-quality clients.
