ASX small-cap shares can be some of the most exciting stocks because of their ability to outperform their larger counterparts.
From little things, big things grow, as the song goes.
Small caps are typically at an early stage of their growth ambitions, so it's possible for that company to grow to a multiple of its current size over time. It's much easier to grow net profit from $10 million to $20 million than to grow profit from $1 billion to $2 billion.
Another benefit of looking at small caps is that they're typically missed by analysts because they're too small. This can lead to undervalued stocks, even though they have a lot more growth potential ahead of them.
Below are two of the stocks I'm excited about due to recent share price declines.
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Step One Clothing Ltd (ASX: STP)
This company is a direct-to-consumer online retailer of underwear. It says it offers a range of high-quality, organically grown and certified, sustainable, and ethically manufactured underwear.
The Step One share price has fallen by approximately 30% since the sale of shares by founder and CEO Greg Taylor. With the Step One share price down so much, this could be a good time to pounce on the ASX small-cap share.
I believe the business has a lot of growth potential because of its global expansion efforts. In FY24, it grew revenue by 29.7% to $84.5 million, with Australian revenue rising 18.3% to $50.9 million, United Kingdom revenue growing 33.2% to $27.1 million, and United States revenue climbing 261% to $6.5 million.
The scale of Step One's growth in the US and UK suggests to me that the company could expand significantly in those two markets.
It was also pleasing to see Step One demonstrate operating leverage, where its profit rose faster than revenue. FY24 net profit increased by 43.9% to $12.4 million.
I'm hopeful the company can continue to grow revenue and profit, particularly if it grows in additional markets like Canada.
Audinate Group Ltd (ASX: AD8)
Audinate is changing the world of AV (audio visual) with its Dante IP networking solution. It claims to be the world leader and serves clients in the professional life sound, commercial installation, broadcast, public address, and recording industries.
The idea is that it replaces traditional analogue audio cables by transmitting synchronised audio signals across large distances to multiple locations at once, using just an ethernet cable. Audinate is also looking to grow its presence in the video market, which is a huge addressable market.
To demonstrate the global scale of the ASX small-cap share, I'll note it has regional headquarters in the US, the UK, Belgium and Hong Kong.
The Audinate share price looks a lot cheaper after falling almost 70% from 15 March 2024.
It's facing several headwinds, including shorter order lead times, increased inventory across the industry, slower clearance of raw material inventories by manufacturer customers, and softer-than-expected demand from end-users.
The company expects FY25 to be a transitional year and that it will return to growth in FY26 with more normal customer order patterns. If this prediction comes true, the market may be underlying the ASX small-cap share's growth potential from FY26 onwards.
