We recently published a list of 10 Best Debt-Free IT Stocks to Buy Under $10. In this article, we are going to take a look at where AvidXchange Holdings Inc. (NASDAQ:AVDX) stands against other best debt-free IT stocks to buy under $10.
Debt generally has a negative connotation – it could be a burden on individuals, a government, or, in the case in discussion, an organisation. So, why do companies still accumulate debt? There are several reasons, but the primary reasons are – the cost of debt is cheaper than other financing options such as equity, debt doesn’t lead to ownership in the company and doesn’t dilute the owners’ equity position in the business, and debt is cost-effective because interest on debt is tax-deductible. Debt can be used to fund expansion or operations, or even to pay down previous debt. It can also be used to invest in research and development without giving up control.
On the other hand, debt has a fixed cost and interest rate, representing a significant potential threat to the company’s operations and, in severe cases, its existence. Lenders can foreclose if interest and principal are not paid as agreed, possibly requiring the business to cease operations and liquidate its assets. From a small cap stock’s perspective, this angle becomes much more important due to the usual volatility in their business and the relatively higher interest rates they are charged because they are smaller in scale.
While increasing debt is risky, harsh macroeconomic conditions make it further challenging. In an interview with CNBC on March 12, Bridgewater Associates founder Ray Dalio highlighted a growing supply-demand imbalance in the U.S. debt market. He highlighted that although some investors remain optimistic due to past resilience, the current situation is structurally different. He explained that the volume of debt the U.S. will need to issue may exceed demand from global investors thus creating a near-term risk. Dalio believes the fiscal deficit must be significantly reduced to address this imbalance, from the current projected 7.2% of GDP to approximately 3%. Without such adjustment, the U.S. could face difficult decisions, including debt restructuring, political pressure on foreign creditors, debt monetisation, etc.
With this challenging backdrop and rising bankruptcies, investing in financially stable companies becomes crucial, especially in the case of volatile stocks. CNBC recently reported that corporate bankruptcies in the U.S. have surged to their highest growth rate since the aftermath of the Great Recession, surpassing even the levels seen during the COVID-19 pandemic. In 2024, 694 companies filed for bankruptcy, up from 635 in 2023 and even above 638 in the pandemic year 2020. During the discussion, the CNBC panellist explained that the main reason for this trend is the continued increase in interest rates, which has made it much more expensive for companies to manage their debt.
Interest rates might remain elevated for a longer period, and thus investing in debt-free, affordable stocks may be the right decision in these volatile times. Although small cap stocks are risky, identifying fundamentally strong companies with low or no debt can allow investors to capitalise on their growth opportunities without the added risks of debt.
Our Methodology
We used online screeners to compile a list of IT stocks with a stock price below $10 and a market capitalisation of at least $300 million. For the shortlisted stocks, we compared their enterprise value (EV) to their market capitalisation (EV to Market cap ratio). A ratio below 1.0 would mean that the company doesn’t have any debt or has minimal net debt. We then identified the top 10 stocks with the highest hedge fund ownership from this refined list by leveraging data from Insider Monkey’s Q4 2024 hedge fund database. Finally, we ranked these stocks in ascending order based on the number of hedge funds holding positions in them.
Note: All pricing data is as of market close on March 27.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
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AvidXchange Holdings Inc. (NASDAQ:AVDX)
Ent. Value: $1.4 billion; Market Cap: $1.8 billion
EV to Market Cap: 0.8
Share Price: $8.55
Number of Hedge Fund Holders: 34
AvidXchange Holdings Inc. (NASDAQ:AVDX) is a software-as-a-Service (SaaS) based company that provides cloud-based accounts payable (AP) automation and payment solutions tailored for mid-sized businesses. Its platform helps clients across industries such as real estate, construction, and financial services streamline invoice processing and electronic payments, leading to lower costs and greater efficiency.
On March 14, Bloomberg reported that AvidXchange Holdings Inc. (NASDAQ:AVDX) is considering a potential sale after attracting takeover interest, even from private equity firms. The company has hired Financial Technology Partners to assess its options. However, discussions are still in progress, and the company may or may not decide to go ahead with the deal, especially given recent market volatility.
AvidXchange Holdings Inc. (NASDAQ:AVDX)’s stock was up nearly 14% as the market reacted positively to the news. Following the news, Robert W. Baird analyst David Koning, who has a Buy rating on the shares, called the takeover interest as expected given the company’s steady, though slightly slower growth, healthy margins, and a strong balance sheet. He estimates a potential acquisition price between $12 and $13 per share, factoring in AvidXchange’s net operating losses and cash position. Even with valuation under pressure, the analyst is positive about the B2B payments sector and AvidXchange’s potential for long-term growth. His confidence is backed by the launch of new products and improving economic conditions. He maintained his Buy rating with a price target of $12. As of Q4 2024, the company held $389 million in cash and equivalents against only $9.1 million in long-term debt, giving it a strong net cash position.
Overall, AVDX ranks 1st on our list of best debt-free IT stocks to buy under $10. While we acknowledge the potential of AVDX to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AVDX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.
Disclosure: None. This article is originally published at Insider Monkey.
