2 Tech Stocks With Major Upside Potential

We’ve seen a strong bounce off of the recent lows for the Nasdaq 100 (QQQ) since the late June pullback, and we continue to see a relentless bid under the top growth stocks, with many names like DocuSign (DOCU) up triple digits year-to-date. However, we’re finally beginning to see a little bit of froth in the market…

and the Nasdaq-100 is getting a little extended short-term, suggesting that it might be wise to be patient before putting any new money to work here.

Fortunately, there a couple of mid-cap tech stocks that continue to stand head and shoulders above the rest, with sales growth of 30% or higher that is carving out a niche with their unique offerings. If we could see the market pull back a little, these are two candidates worth keeping an eye on, as I believe they still have further room to grow long-term.

Let’s take a closer look below:

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The Software Group (IGV) has been one of the strongest groups this year, and Avalara (AVLR) and Alteryx (AYX) are two relatively new companies in the group, both seeing their IPO debuts in the past five years. Generally, it’s the newer companies that have the most considerable runways long-term as they’ve yet to mature to a point where they can no longer grow sales at 30% plus each year. Avalara and Alteryx both fit this bill, and both have dominant positions in their niche within the software space.

The former is the leader in tax-automation software, an area that’s seen significant demand from businesses since the South Dakota vs. Wayfair (W) decision, which requires remote sellers to collect and remit sales tax. The latter, Alteryx, is a data-analytics software platform that makes advanced analytics available to workers.

This both speeds up their everyday processes and minimizes human errors. While both companies have had incredible runs since their IPO debuts, we continue to see upwards earnings revisions in both names, suggesting that they are likely headed higher long-term. Let’s take a look at Avalara first:

As noted above, Avalara is the leader in the tax automation space, and its software is essential for small and medium businesses operating out of several states. This is because we now have more than 90% of the states with economic nexus laws, but most of them have different thresholds for collecting and remitting sales tax.

Some states have a minimum limit of $50,000, others as much as $150,000, and some even had quirky rules, like in Iowa, where you are do not have to collect sales tax if consumers are eating the pumpkins you’re selling them, but you better collect it if they’re planning to carve or decorate them.

This extremely confusing process is solved by Avalara, whose software automates the process for businesses so they can focus on what’s important, their business, and leave figuring out which rules apply to each state to the software. Let’s take a look at the company’s growth below:

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(Source: YCharts.com, Author’s Chart)

As we can see from the chart above, Avalara has spent several years posting net losses but is finally expected to report positive annual earnings per share in FY-2021. For companies that don’t have earnings on the table yet, I rely on sales growth, and the sales over the past few quarters have been incredible.

Avalara reported sales of $111.4 million in Q1 2020, up 31% year-over-year, another quarter of record revenue for the company. Circling back to earnings, the move to positive annual EPS is a significant catalyst as many of the largest growth funds will not buy a stock until it has positive earnings growth.

If we look ahead to FY-2022, annual EPS estimates have climbed from $0.24 to $0.32 in the past six months, and this would translate to a 1000% growth rate in FY-2022, assuming the company can hit these targets. Based on this, the company would be one of the highest-growth companies in the market. It’s worth noting that the company has barely scratched the surface on its international opportunity, as it’s just begun to start selling in Europe.

Given these robust growth rates and a leading position in a growing space with an estimated TAM of over $10 billion, I see the company as…

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