Penny stocks remain a good bet for investors seeking big gains. Of course, investors in such stocks require a high-risk tolerance and a strong stomach for volatility. The market currently is not in its best form, with fears of an economic downturn looming large. However, that doesn’t mean that the playing field is entirely devoid of opportunities. You still have plenty of companies that could turn out to be multibagger investments a few years or even months down the line, regardless of the near-term environment.
A good way to identify potential penny stock winners is by looking for companies that are growing rapidly and are at or near profitability, with little-to-no dilution risk. Most penny stocks are highly dilutive, which ends up crushing the stock in the long run, even if the company manages to stay afloat.
Thus, it’s prudent to focus on investing in penny stocks with underlying businesses that have some form of buffer, while providing growth that could carry the share price higher over the long-term. In the penny stock world, separating the wheat from the chaff is crucial.
Here are three penny stocks that fit that criteria.
Zedge (ZDGE)
Zedge (NYSEMKT:ZDGE) is a company that operates digital marketplaces and develops games. The company offers a range of products and services, including ringtones, wallpapers, and sounds for your phone. Additionally, Zedge provides a game for photo challenges, and serve as a trusted source for emojis.
Zedge is one of the more beaten-down stocks in this list, and that is for many reasons. The biggest reason is that Zedge’s customer base is predominantly Android-based. Android phones have seen declining market share in recent years. Moreover, iOS users aren’t too enthusiastic about customization. On top of that, Apple’s (NASDAQ:AAPL) App Transparency Tracking (ATT) framework has made paid iOS user acquisition less efficient and more expensive.
However, it isn’t all doom and gloom with this company. Zedge could see a major turnaround as it has begun implementing AI-made content into its offerings. A potential ace up the company’s sleeve is its massive user base. The Zedge app has been downloaded over 436 million times (as per 2023 data) and had more than 30 million monthly active users. This is a very big user base the company can monetize with its low-cost AI-made Wallpapers and even Ringtones.
Moreover, Android phones are far from dead. Android’s market share fell slightly in 2023 but is expected to gain this year to 70.69% against iOS’ 28.58%. Analysts see a big rebound in profitability next year, meaning you’re currently paying slightly over 11-times forward 2025 earnings. Revenue growth is also expected to come in at 8% this year and 15% next year, indicating big turnaround potential.
TeraWulf (WULF)
TeraWulf (NASDAQ:WULF) has traditionally been a Bitcoin (BTC-USD) mining company, but it is quickly diversifying its operations. What sets it apart from other miners is that the company uses nuclear energy and other zero-carbon energy sources to mine Bitcoin. This makes it look like a much better choice for institutional investors who want a stake in crypto mining without harming their ESG scores, since most Bitcoin miners have poor ESG ratings.
I believe Bitcoin will likely rise more this year after its correction. Bitcoin tends to build up a lot of momentum in the months following the halving after a correction, and we could see the same thing play out this time around. However, what makes me more bullish on WULF stock is that the company is expanding into HPC (High-Performance Computing) and AI zero-carbon infrastructure.
The mining costs here are actually quite low – TerraWulf’s energy costs have only accounted for around 54% of the company’s total cost of production at just $0.0035/kWh. Its 2024 guidance points to its mining cost per Bitcoin rising from $25,149 to $36,780 after the halving. Thus, analysts expect earnings per share to rise from 4 cents in 2024 to 22 cents in 2025. The current price of the stock is just 10-times 2025 earnings. To top it off, revenue is also expected to grow 147.3% this year and 30.1% next year.
Lantronix (LTRX)
Lantronix (NASDAQ:LTRX) provides a range of software, connectivity services, and engineering services. These offerings include IoT building blocks & gateways, cloud-based device management, and automated downtime managers. In simple terms, this company is involved in the cloud and data center business, which is red hot.
It is difficult to find pure-play cloud and data companies in the current environment, especially one as cheap as Lantronix. LTRX stock has been basically trading sideways over the past six years.
However, I believe this penny stock could see a breakout similar to Data Storage Corp’s (NASDAQ:DTST) recent run. It trades at less than 10-times forward earnings, driven by growth that hasn’t been stellar of late. But if the company can land big contracts with some AI players, we could see big moves to the upside.
The available market the company is addressing in the three different verticals is $8.5 billion, and management expects the company’s compound annual growth rate over the next few years to be approximately 12%. Notably, Lantronix grew revenue by 25% year-over-year and beat on both the top and bottom line in its recent earnings report.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
