Motley Fool Canada is selling their version of the “bundle” that so many newsletter publishers push — they call theirs Market Pass ($799 first year, renews at $999), and it includes access to the North-of-the-border versions of Stock Advisor, Rule Breakers, Hidden Gems, Everlasting Stocks and a Canada-only publication called Dividend Investor.

But what caught our eye is that the latest ad for this Market Pass is, no surprise, an AI pitch — they’re calling their special report, “AI Inflection Point: Top Small-Cap Sleeper Stocks for the AI Boom,” and it’s all about small-cap stocks that might surge because of the growth of artificial intelligence. This particular pitch is penned by Rex Moore, who’s been an analyst there for a long time, in case you’re keeping track.

Which sounds a little similar to their “Microcap AI Sleepers” pitch from last month, but the stocks are at least a little bit different… so let’s see if we can ID some more picks for you.

And yes, we would love for you to participate in our Gumshoe Gives Back campaign, since it’s that time of year again, but we won’t make you pay $999 to learn the answers to these teasers… we can at least get you started for free, just lend me your ears:

I’ll do your patience a favor this time and skip over much of the “big picture” part of the ad — I’d sum up that argument, “the AI mania is going to send some tiny stock soaring, since crazy growth is more likely with tiny companies than with huge ones, and lots of folks don’t follow these ideas.” That’s at least plausible, though nobody, of course, can accurately chart an unfolding mania with any precision… who knows, maybe the AI boom will really rhyme with the dot-com boom of the late 1990s, which could mean that the buildup of really absurd investment valuations takes a couple years, leading to lots of small-cap excitement and hot IPOs in 2024 that keep the mania going. There is at least the possibility that we’re still in the “you ain’t seen nothin’ yet” phase of the mania, which could make for an interesting year or two.

But we’ll get right to the specifics. Here are the clues that the Fool drops about number one on their latest “Microcap AI Sleepers” list:

“A tiny AI-powered digital identification software provider who’s tech has been used by more than 80 million consumers to date and has helped in the facilitation of TRILLIONS of US dollars. Chances are you’ve even used this company’s software yourself, but at a puny $500 million USD market cap, I’ll bet you’ve never heard the name before.”

That is not enough clues to be 100% certain, but Thinkolator sez it’s very likely to be Mitek Systems (MITK), which might sound familiar to some of you because it’s in our $100K Lock Box Portfolio. They’ve been through a strange time since we bought a couple years ago, including long delays for their 2023 financial filings, so there’s been a high degree of uncertainty about exactly how the business is doing this year… but the core business, the one that has “been used by more than 80 million consumers to date,” is mobile check deposit. Which seems kind of old-fashioned now, with so few paper checks in use, but is still a very large business, and a big re-order from one of their major bank customers helped to goose revenue growth this year.

The reason to hope for growth far into the future, when presumably paper checks will eventually become fully extinct, is that they’re building on that technology with their digital ID-verification services, which are so-far smaller but growing much faster. That’s built on the same basic technology, using the phone’s camera to check government IDs and connect them to a digital account, (so folks like AirBNB can make sure the person showing up at your home is a real person and is who they say they are, for example, or so that a brokerage firm can verify your identity before opening an online account), and it seems a reasonable presumption that this business will keep growing, and that they might become a leader… though it’s not at all certain, of course, that Mitek will dominate digital ID verification the way they dominate mobile check deposit.

As of last week, Mitek had sort of caught up on its filings — they have now filed the 10-Q for each of the first three quarters of their 2023 fiscal year, which ended on September 30, but they haven’t yet filed the 10-K for the full year. They did report preliminary results and host a conference call for the September quarter and full year, and provide some guidance for the 2024 fiscal year (we’re in Q1 of that year now)… so we know that they had revenue growth of 19% last year, and adjusted earnings per share of 94 cents, which was roughly flat with the year before (92 cents in FY22). The growth and profitability of the digital identification/ID verification business has been disappointing, but the company did commit to being at break-even for that business by this time next year. The company is telling us to expect 6-9% revenue growth, and an operating margin that is roughly the same as this past year, so that would mean earnings growth probably in that same range.

The good thing? If you can stomach the uncertainty over the fact that they still haven’t completed the 2023 audit, and will have to petition to the Nasdaq again to avoid delisting while they work on their delayed 10-K (they’ve done this a few times over the past year), the stock is pretty attractively valued at about 12X adjusted earnings. Particularly if you think the ID verification business will be an area of major future growth, and that the mobile check deposit business will at least stay relatively stable, even if it maybe doesn’t grow as much in the future as it did this year with that one major customer renewal (and, to be fair, an overall strong retention rate of 115%, so it’s not currently shrinking at all).

This one’s still in the “on hold” category for me, I hate to rely too much on unaudited financials… but we’ve gotten three or four more quarters of “real” information since the initial failure to complete their 2022 10-K a year ago, at least, and it now looks a lot better than it did when I last reviewed the $100K Lock Box holdings back in September. Things are firming up, with more clarity, better revenue growth, and worse earnings growth than was expected six months ago, but the ID verification growth has been disappointing so far, and it doesn’t look like they see that turning around quickly, so we’ve probably got time to think it over and see if they can keep their Nasdaq listing as they continue to try to get a handle on their accounting.

Again, not a certain match for this clue… but for further confirmation, the Motley Fool’s US operation owns Mitek shares, and has recommended the stock to their US subscribers in the past, though there is not as of yet any coverage of the stock in the free articles at Fool.ca.

And the second “secret” stock:

“A founder-led, AI-powered SaaS platform that’s a solution for some of the biggest corporations in the world like Amazon, Walmart, and Starbucks yet is a fraction off their size at less than a $1.5 billion USD market cap. Revenue is growing fast and the company is now firmly profitable, so maybe that’s why the board just authorized a $100 million USD share repurchase plan at a 10% premium to the current share price.”

Well, it’s not going to really be “founder-led” anymore, but this is a repeated tease for Docebo (DCBO), the training/education software platform provider that the Canadian Fools have been pitching as one of their favorite “AI” picks for much of this year… so this is the one of the three ideas that stays the same as when they sent out their “Microcap AI Sleeper Stocks” pitch in November.

Docebo’s founder and CEO, Claudio Erba, is transitioning out of the CEO role and will no longer sit in that office as of March of next year, but he is staying on as Chief Innovation Officer — so it sounds like he wants to get back to the work that built the company, not deal with employees and shareholders and running a large organization, which is perfectly understandable.

And yes, they did authorize a $100 million share repurchase last month, and the stock was ~10% higher at the time (it popped to the low $50s in mid-November), though I’m sure they didn’t actually do the full repurchase at that price. Usually buybacks take a while, and often companies don’t even follow through on a full repurchase authorization… but that’s OK. And shareholders should only want companies to repurchase shares when they have surplus cash and good cash flow but a low share price, not after the shares have popped higher or when they’re trading at a high valuation, you certainly don’t want your company buying back shares “at a 10% premium”

(The temptation of tech stocks and growth stocks is to use big share repurchases to make up for the impact of stock-based compensation, and limit the dilution for shareholders… which can work out OK, even if it perpetuates a lie by pretending that payroll costs are really more like a capital expense, but in the past many such firms have also used buybacks to try to goose the share price during manic times, and tend to be reluctant to buy back shares when people feel scared and the stock is more beaten-down, which is exactly when they should be buying back stock. Companies doing share buybacks regularly fall into exactly the same trap as individual investors: They want to buy when the price is high, but they’re too scared to do so when the price is low.)

Here’s a little update of what I shared with you when I last covered Docebo for a different Motley Fool teaser, about a month ago:

Docebo is involved with AI, but in a fairly limited way thus far, developing AI systems to help them create better learning and training programs for their corporate customers (Docebo sells a cloud-based learning management system for education and development of employees). I don’t know if they’ll become an A.I. barnburner, but they do have solid longer-term contracts for their SaaS platform, with growing revenue and good customer retention, so it’s quite possible that they’ll be able to grow into their fairly rich valuation, especially as a small company — market cap is right around $1.5 billion now, they’re currently valued at about 58X next year’s estimated adjusted earnings (~100X trailing earnings), and earnings growth could be in the 50%/yr range for a few years if they stay on trend, which is what the average analyst expects (they really have just started to be profitable, and growth from zero often looks very fast). They’re also profitable on a GAAP basis, not just “adjusted,” so the stock-based compensation is not as egregious as it is with some smaller tech companies.

Still speculative and dependent on growth, like a lot of small technology companies, but it’s probably not a ridiculous idea at a valuation of about 8X their annualized recurring revenue, the current revenue growth of 25% or so should be enough to turn that into solid results over a few years if they can keep it up and keep their customer retention numbers high, as they are right now, which should help the margins continue to steadily improve with scale. The annual recurring revenue number keeps growing, as expected, and is now at $182 million, so that’s a pretty solid recurring revenue base, from mostly large and solid corporate customers (the average contract value is pretty big, and growing — about $49,000 last quarter, roughly 10% growth from a year ago). Docebo has perked up this year, but is still, like so many companies that got exciting in 2021, well below their manic highs of a couple years ago.

And we get clues about one more, so here’s your third batch of hints…

“A small-cap with roots dating back to 1976 that has a long history of being an early adopter of new technology. Not only was this one of the first companies to pivot its model to the internet in 1995, but it was also early to AI, launching its first set of AI features all the way back in 2017. Management recently revealed that they plan to leverage AI in even more significant ways going forward, but no one seems to be paying attention. This tiny company sits at a market cap just over $500 million USD and is led by a founder who owns a whopping 44% of the company.”

This is a little bit of a surprise, what the Foolies are teasing is almost certainly 1-800-Flowers.com (FLWS), which is indeed a longtime early adopter, they were one of the first to build a fulfillment network using 1-800 numbers, then one of the first commercial websites with an AOL partnership early on, and apparently they’re also using “conversational AI” to facilitate gift purchases. FLWS owns not just the eponymous global flower ordering network, but also lots of similar online gift-focused brands like Harry & David, The Popcorn Factory, Shari’s Berries and a bunch of other suppliers of gifts and treats.

How else do we match the clues? Jim McCann is the founder of 1-800-Flowers, and he did indeed start out with a few flower shops in New York City in 1976, and the market cap is close to the Fool’s tease (it’s around $600 million now, but the stock has also jumped about 20% higher over the last month). McCann owns most of the “B” shares of FLWS, and the family owns a lot of the rest (maybe all, I haven’t checked), so his ownership doesn’t pop up obviously on some websites, but as of the last SEC filing he owned or controlled a little over 20 million “B” shares and a few hundred thousand regular “A” shares (B shares can be converted to A anytime, but they don’t trade themselves… and each B share has 10 votes, while the A shares each have only one, pretty typical of these companies that want the founder to keep voting control in perpetuity… Jim is 72 now, I think, so there’s a lot of succession planning and lots of the shares are owned by trusts, but he controls them). That’s not exactly 44% ownership, as teased, but it’s in the neighborhood and press reports often cite him as a “40% owner”. Overall, there were 58.3 million A shares outstanding and $32.3 million B shares outstanding as of the last Annual Report, so roughly 36% of the shares are somewhat “hidden” — “B” shareholders control about 85% of the vote at FLWS, and own about 36% of the equity.

Jim McCann stepped down as CEO back in 2016, by the way, and gave the job to his brother, Chris McCann, but Chris stepped down for health reasons this year and Jim took the CEO job back… and there are some other McCann’s involved as well.

That’s a confusing jumble of numbers when it comes to the shareholder base, but for our purposes we can just note that CEO/Founder Jim McCann controls the company, with an overwhelming majority of the vote and a near majority of equity shares. And that also means it’s not really a $600 million company, the real market cap, once you include the B shares which could be converted to A and begin trading anytime those holders like, is about $850 million.

How is the company doing? Well, since they went public in 1999 they have almost always generated positive free cash flow, and that number has generally been trending higher over the years… and they’ve also grown their revenue almost every year… but they’ve never improved much when it comes to free cash flow margins or earnings margins. They’re growing, but they seem to be focused more on growth than on profit. The earnings per share at FLWS this year have been almost identical to what they were in 2002.

That’s probably not entirely fair, given the wild disruption this business has seen since the pandemic — there was a quick surge of orders during COVID, as e-commerce took over the world, but there was also a pretty dramatic collapse in the traditional gift business both because of the lack of office workers (fewer suppliers sent a giant popcorn bucket to the office of their customers at Christmas if there were no workers) and, more recently, because of the impact of inflation on the consumer business, the Valentine’s Day and Mother’s Day bouquets that have been the driving force for the flower industry for decades. The current analyst estimate is that FLWS will post earnings of 27 cents per hsare in 2024, and will grow nicely from that as margins improve (46 cents in 2025), though top-line revenues are widely expected to be somewhat “stuck” in the $2 billion neighborhood.

It stands to reason that combining all of those into one technology platform and one corporate structure probably provides some economies of scale, and that things should be back on some sort of normal trajectory post-COVID, but it’s not at all clear to me exactly what that will mean. If we go with the analyst forecasts, then FLWS is trading at close to 20X forward earnings, with minimal revenue growth after seeing revenue fall in 2022 and early 2023, but some pretty good earnings growth as they squeeze a little more profit out of the business.

Might AI help with that? Sure, I guess, AI should be able to improve marketing and order processing, and it’s not a new thing for them, they won an award for their implementation of an AI “concierge” bot back in 2017, powered by IBM at the time… but launching AI tools right now is also quite expensive, given the massive processing power needed for commercial-scale projects, so I don’t know if it will cause a sudden surge in earnings.

Interesting idea, and I do like that they’ve continued to build on their large platform of gift options, and to cross-market those brands, including with membership programs that give people free shipping or other perks across all the brands, making it easy for corporate buyers, particularly, to keep up the steady flow of cookies, flowers, popcorn and personalized gifts for all of the folks they want to please and impress. I also like that the founder is back in charge, and there’s something to be said for incrementally building a gigantic platform company and scaling up for decades, in part by reinvesting profits into building the business instead of maximizing shareholder returns… but at some point shareholders have to see a return, or they give up. That looked like it was happening during 2020 and 2021, when they had blowout earnings and the stock soared, but the history has not been great. Even if we bypass the initial nutty valuation they got from going public in 1999, as one of the first dot-com businesses during the dot-com bubble, and start our chart 21 years ago today, in 2002, this is what the total return looks like for FLWS shareholders (in purple) compared to the S&P 500 (orange):

So… I don’t know if I’d bet on them to really “catch up” thanks to AI. If you’re looking for a positive nail to hang your hat on, it might be that FLWS is trading at pretty close to its lowest price/sales ratio ever, at about 0.3X sales the company is as cheap as it was in the 2008 crash. That doesn’t mean they’re guaranteed to turn things around, start growing again, or become much more profitable… but there is room for them to do so, they are clearly not maximizing their profitability right now, compared to their own history.

Will the founder bring back the magic following his re-accession to the CEO role this past summer? I don’t know… but I don’t see a lot of big reasons to bet on it, personally. They’re in decent shape if some semblance of traditional gift-giving routines returns, particularly at the corporate level, and most likely the drop in consumer “flowers and chocolates” buying will be moderated as inflation gets under better control… but the world of retail is changing, too, with platforms like Shopify and Amazon helping a million small vendors bloom, and it could be that AI is as powerful a force for the smaller and emerging brands as it is for longtime leaders like 1800Flowers.com. FLWS has the distribution and a good customer base, and those are valuable assets, but I don’t know how valuable… particularly given their failure to really generate a meaningful amount of profit for shareholders over the past couple decades.

Can’t say that an hour’s research gives me much conviction either way, so I’ll pass for now, but it’s an interesting and contrarian story.

The Motley Fool Canada has now used this same “AI Sleeper” pitch about small-cap stocks twice in a month or so, and though the services they’re selling are slightly different (they first pitched this as part of a “Microcap Mission”), it seems pretty likely that it’s roughly the same report being sold in a couple different ways. If so, that would mean we’ve now identified five out of the nine “AI Sleeper Stocks” for you — these three today in Docebo (DCBO), Mitek (MITK) and 1-800Flowers (FLWS), plus the two tiny picks we wrote about last month in Propel (PRL.TO, PRLPF) and Thinkific Labs (THNC.TO, THNCF). Here’s how all five of those have looked so far this year, just to give you some context, though it seems as though the Fool probably put this recommendation list together sometime in early November — and you can see the impact that attention likely had on two of the smaller stocks, particularly, Thinkific (in blue) and Propel (green), but also on Docebo (purple) to some degree.

Have any thoughts on who the other four “sleeper stocks” might be? Think there are grand times ahead for any of these five picks we’ve ID’d so far, or better matches for the clues? Please share your thoughts with a comment below… and don’t worry, we don’t bite.

Disclosure: of the companies mentioned above, I own shares of Amazon, Shopify and Mitek. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.