The financial world is abuzz with anticipation as the Federal Reserve is expected to cut interest rates later this year. Historically, such a move has proven to be a significant catalyst for small-cap stocks, particularly in the capital-intensive innovation fields. Since the Federal Reserve began hiking rates in March 2022, after all, developmental companies have faced considerable challenges in raising funding.
This prolonged downturn has led many innovation-oriented companies to trade at substantial discounts relative to their commercial potential. Two such companies that stand out are Archer Aviation (ACHR -1.25%) and Ocular Therapeutix (OCUL 5.11%).
Image Source: Getty Images.
Wall Street analysts believe that both stocks are significantly undervalued at their current levels. So once interest rates reverse course and fund managers shift their focus to small-cap value stocks, these two innovation stocks could surge. Armed with this insight, here is a look at each company's core value proposition and associated risks.
The case for Archer Aviation
Archer Aviation, a trailblazer in the small-cap transportation space, is making significant strides in the development of an electric vertical take-off and landing (eVTOL) aircraft. However, since the onset of 2024, this eVTOL innovator has seen a drop in value by approximately a third, a reflection of the market's dour reaction to ongoing macro and geopolitical events.
This substantial decline could represent a once-in-a-lifetime buying opportunity, however. The reason? Archer is in the process of designing an ultra-safe, low-noise eVTOL named Midnight, with the ambitious goal of being the first to market by 2025.
The potential impact of this technology is staggering. Air-taxi services, based on eVTOL technology, are projected to mushroom into a trillion-dollar market over the next two decades. To put this into perspective, Archer's market cap has shrunk to a mere $1.2 billion this year.
Wall Street analysts believe that Archer's shares could reverse their course and rise by 132% over the next 12 months. And in the long term, this innovative transportation stock could emerge as a true hidden gem, given the anticipated parabolic growth in the eVTOL industry.
So, despite the stock's sensitivity to macroeconomic headwinds, it may be worth the risk for patient investors.
The case for Ocular Therapeutix
Ocular Therapeutix is a specialist in eye diseases. Currently, Wall Street analysts believe the company's shares could be undervalued by as much as 210%.
The reason? Ocular is developing a novel therapy for wet age-related macular degeneration (wet AMD), a progressive disease that often leads to blindness. The therapy, known as Axpaxli, could carve out a profitable niche in a market dominated by biotech giants Regeneron Pharmaceuticals and Roche, thanks to its infrequent dosing schedule.
To illustrate this point, Wall Street analysts have a risk-adjusted peak sales estimate of $870 million for the therapy in this setting. Meanwhile, Ocular's valuation stands at just $750 million at the time of writing.
However, it's crucial to remember that Ocular is not a guaranteed success. Eye disease therapies often fail or underwhelm in clinical studies. But the company does have other potential avenues to explore if this particular indication doesn't pan out, giving Ocular an interesting risk-to-reward ratio.
In conclusion, for those willing to take on a bit of risk, this small-cap growth stock presents itself as an enticing speculative buy.
