Penny stocks can deliver some explosive returns for prudent investors. These tiny enterprises often carry enormous potential at a dirt cheap price. In most cases, these firms fail to deliver on their promises. But every once in a while, a success story emerges, delivering millionaire-making returns.
With that in mind, it isn’t surprising why penny stocks are so popular despite the high risk. And one that seems to be getting some attention in recent months is 1Spatial (LSE:SPA).
Today, shares trade at around 69p, with a market capitalisation of £74m. But with an estimated market opportunity of over £675m, investors could be looking at a 9x return if the company’s growth strategy is a success. So is this a screaming buying opportunity?
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What does 1Spatial do?
As a quick crash course, 1Spatial’s a tech enterprise specialising in location master data management (LMDM). In other words, it helps customers organise their data to support critical decision-making, particularly in the transportation, utilities and government sectors.
For example, its 1Streetworks solution automates traffic management by finding viable routes for diversions when roadworks need to be performed. Management’s estimated over 2.5 million low-speed roadworks are performed each year in the UK, creating a £400m market opportunity.
Meanwhile, across the pond, its NG9-1-1 system’s already being used at the federal level to validate location data used by emergency services, tapping into an estimated $350m market opportunity.
The firm has a variety of other solutions in its portfolio, targeting different clientele. But overall, its technology seems to be drawing in some industry titans, including Google (Alphabet), EDF, Atos, QuinetiQ, and Network Rail, along with 1,000 others.
Expectations vs financials
Unlike most penny stocks, 1Spatial’s a revenue-generating business and even a profitable one. Over the last five years, management’s been steadily expanding margins, raising its bottom line into the black, and this trend has continued throughout 2024.
Top-line expansion hasn’t been all that explosive of late. In its latest interim results, revenue increased by just 5% to £16.2m. However, that does put it on track to deliver on full-year expectations of around £36m. And digging deeper into this growth reveals that most of it is coming from recurring revenue contracts.
In the last three months alone, management’s secured several multi-million-pound contracts with a national public authority in France, the United States Forest Service and, most recently, Surrey County Council. Providing its technology lives up to expectations, the recurring revenue generated from these deals will bolster free cash flow and also help build its reputation, attracting new customers in the future.
Of course, it’s not a risk-free enterprise. 1Spatial remains reliant on a few key customers. And the nature of its business makes it an ideal target for cybersecurity attacks. If 1Spatial fails to protect its platform, it could compromise relationships with its critical clients.
The share price has already more than doubled in the last five years, and there’s no denying that the valuation’s a bit rich. But if management delivers on its targets, 69p a share doesn’t seem too unreasonable.
Personally, I’m keeping this penny stock on my watchlist for now. However, for investors with a higher risk tolerance, the company may be worth a closer look.
