Though multiple sectors remained volatile, the first quarter of 2021 came to a close with a remarkable small cap rally that took many by surprise. One small cap sector, in particular, emerged as a powerhouse—Technology. Riding the crest of an unprecedented growth wave stimulated by robust investment association with digital transformation and strong fundamentals, the technology small cap sector exploded higher, marking an impressive gain.
A recent analysis shows that the Russell 2000 Index, a common barometer of small cap performance, has outpaced its large-cap counterparts like the S&P 500 during this time. The surge can be substantiated by the index’s 12.4% surge in Q1 2021, compared to the 5.8% increase recorded by the S&P 500. Tech-centric small cap stocks have lead this charge, thereby underscoring the tech sector’s robust growth trajectory.
The leading frontline in the tech small cap sector has predominantly been steered by Software and Services companies. Their success is linked to the accelerated digitalization brought about by the COVID-19 pandemic. In a socially distanced world, demand for remote working, learning, and entertainment digital solutions has skyrocketed. As a result, the need for software and cloud computing services has grown exponentially, pushing the small cap tech stocks to new heights.
The likes of Cloudflare, Inc. (NET), nCino, Inc. (NCNO), and Shift4 Payments, Inc. (FOUR) have been some of the key trailblazers within this space. Their growth trajectories symbolize the exceptional performance of the tech sector’s small cap. For example, Cloudflare, the website security and performance service provider, saw a year-over-year revenue growth of about 50% in 2020. Meanwhile, nCino and Shift4 Payments recorded an increase in product demand, resulting in strong financial performance.
On another front, the technology hardware sector hasn’t lagged behind. Companies like Enphase Energy Inc. and SolarEdge Technologies Inc. are a testament to this phenomenal growth. Bolstered by Biden’s focus on renewable energy solutions and a global shift towards sustainable practices, these companies have put up commendable performances so far.
Furthermore, Semiconductor stocks under the small cap category received an adrenaline shot due to the global chip shortage. The widening gap between the supply and demand of semiconductors has led to a price surge in the semiconductor industry. As a result, semiconductor-related small caps, such as Dialog Semiconductor and Semtech Corporation, have seen their stock prices skyrocket.
Though the technology small cap sector witnessed a stunning performance in Q1 2021, it remains important to note that small cap stocks often come with their share of risks, including higher volatility and susceptibility to market fluctuations. Furthermore, investors need to thoroughly research and consider their risk tolerance before investing in such stocks.
Moreover, it’s worth keeping an eye on the unfolding trends in 2021, such as the tug-of-war between growth and value stocks, and the influence of geopolitical tensions between the United States and China. These factors, among others, will certainly shape the future performance of small cap tech stocks.
To conclude, the burst of growth in technology small cap stocks has shone a spotlight on the transformative power unraveled by resilience in the face of a pandemic. As an investor, this sector’s poised explosion presents an interesting territory to consider as the financial year unfolds.
