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

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?

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.

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.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

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

SMSF strategies

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

The ageing ‘crisis’ has not and will not happen

Rising age dependency is frequently treated as a warning sign for economies. But when actual workforce participation is examined, a strikingly different picture emerges about ageing, productivity and economic sustainability.

Retirement

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Shares

Four charts that expose market concentration risk

Investors have recently been rewarded for backing market leaders, but history suggests this eventually comes at a cost. Now may be the time to review whether your portfolio is carrying unintended risks beneath the surface.

Investment strategies

The case for gearing beyond property

Most Australians gear into property but ignore shares. That may be a mistake. Used carefully, geared equity strategies can enhance long-term returns, reduce cash tied up in growth assets and support retirement income goals.

Economy

Australia's $1 trillion debt pile

The headlines exclaiming that Australian government debt has hit A$1 trillion and US government debt has hit $40 trillion has turned heads, but how serious are they really? Will Australia's mix of debt create challenges?

Economy

Has 100 years of growth made us any happier?

For decades, GDP has been the benchmark for economic success, but has it made us materially happier? If happiness does not rise in lockstep with prosperity, are we overlooking what constitutes a successful society?

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.