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 nLight Inc. (NASDAQ:LASR) 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).

A technician in a lab coat inspecting a semiconductor laser.

nLight Inc. (NASDAQ:LASR)

Ent. Value: $326 million; Market Cap: $414 million

EV to Market Cap: 0.8

Share Price: $8.27

Number of Hedge Fund Holders: 24

nLight Inc. (NASDAQ:LASR) provides advanced laser solutions which are used in industrial, microfabrication, and aerospace and defense applications. Its high-performance semiconductor lasers and fiber lasers are critical in various applications, including material processing, medical devices, and defense systems.

In late February, Needham analyst James Ricchiuti reiterated a Buy rating on nLIGHT (NASDAQ:LASR) with a price target of $14. The analyst expressed confidence in the company’s long-term potential. While the analyst expressed caution for the near-term outlook, particularly for the commercial segment, he sees strong growth prospects in the defense business. According to him, this business is expected to grow by 25% in 2025, driven by a strong 55% increase in backlog during 2024. However, the analyst also points out that the commercial segment is likely to see a drop in revenue over the next two years. Despite these hurdles, he views nLIGHT as having a favorable risk-reward balance, with its focus on the defense sector being a key factor for future growth.

Around the same time, Ruben Roy from Stifel Nicolaus also reaffirmed a Buy rating on the shares with a price target of $14.

Overall, LASR ranks 9th on our list of best debt-free IT stocks to buy under $10. While we acknowledge the potential of LASR 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 LASR 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.