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Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

In this article I will show that DATATRAK trades at an extreme discount to Medidata and that the discount should narrow.

DATATRAK (OTCQX:DTRK) competes with Medidata Solutions (NASDAQ:MDSO). A short description of DTRK's business from their 10-K: "Customers use DATATRAK's software to collect, review, transmit and store clinical trial data electronically. DATATRAK's customers are companies in the clinical pharmaceutical, biotechnology, contract research organization and medical device industries. The Company's services assist these companies in accelerating the completion of clinical trials more efficiently and safely by providing improved data quality and real time access to information on a global scale."

MDSO's trailing 12-month revenues are about $261m and consensus pegs 2014 revenue at $340m. Meanwhile, consensus earnings estimates for 2013 and 2014 are 0.72 and 0.82, respectively. In other words, MDSO trades at 73x this year's earnings estimate and roughly 9x this year's revenue estimate (ex-net cash). MDSO thinks it can grow 20%-25% annually over the long-term.

By contrast, prior to the September 2013 quarter when it earned 0.09 per share DTRK had not been profitable since 2010. However, DTRK trades at 0.9x its trailing 12-month revenues of $10.9m. In addition, DTRK's backlog at September 2013 was $21.9m, almost double the level at the end of 2010.

So results are improving, although I would not expect ongoing profitability for DTRK. In its latest 10-Q (it post filings although it trades on the pinks) it said revenue and earnings were up because of " revenue from the accelerated usage of an enterprise agreement." In addition, in an earlier conversation with the CEO, who owns about 10% of the stock (about 1.5m shares outstanding fully diluted after a 1 for 12 reverse split), he said they expect to continue to invest in sales and marketing.

So DTRK is in a growing industry, helping automate the clinical trials for medical companies, and trades at one-tenth the revenues of its larger competitor. Clearly, a larger competitor (Oracle, Medidata) could take over DTRK and remove a great deal of their sales & marketing costs, making an acquisition quite accretive, although the company has made no indication that it is exploring strategic alternatives.

In the meantime, if the 0.09 per share per quarter were sustainable that would indicate 0.36 per share annually. Were DTRK to trade at one-half MDSO's price earnings valuation the stock would be $13. Alternatively, if DTRK were to trade at just one-quarter of MDSO's revenue valuation it would suggest a $16 price target. So in sum, I think DTRK is undervalued relative to MDSO and I expect the valuation gap to narrow as revenue, backlog and ultimately earnings improve.

I should note that DTRK sued MDSO over a patent in 2011 and has made no headway and it does not seem like they will prevail.

Disclosure: I am long DTRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.