Penny stocks can register the same gains in a matter of days that more established businesses take years to achieve. That’s what happened with one of my holdings last week when shares in driver monitoring tech company Seeing Machines (LSE: SEE) jumped almost 30%.
I see no reason to bank my gains just yet. In fact, I’d be inclined to buy more.
Why is this penny stock motoring?
A recent, bullish trading update is one reason. On Tuesday, SEE said royalty revenues from its Automotive division had started as more than 100,000 vehicles left showrooms equipped with its Driver Monitoring System (DMS) tech. News of “significant growth” in its Aftermarket business (where SEE’s accident prevention products are installed in heavy vehicle fleets) was another plus.
All this allowed the firm to say it expected reported revenue for the year to the end of June to come in at A$47.3m. That’s up 18% from the previous year.
Importantly, the AIM-listed company now believes business will “increase sharply” over the next 2-3 years as new transport safety legislation kicks in. In fact, the mid-cap identified potential revenue of “over A$900m” from its automotive pipeline. A recent deal to install its tech into the Air Traffic Control environment (via Airservices Australia) also shows just how broad SEE’s markets might become in time.
The second reason I think this penny stock is flying relates to last Thursday’s news that US chipmaker Qualcomm had made a $4.6bn bid for automotive tech firm Veoneer. A bidding war with rival Magna International may now ensue. This makes me even more confident that Seeing Machines will be snapped up for a tidy sum itself further down the road.
Another false dawn?
As promising as I think this penny stock is, I need to be wary of bias when it comes to SEE. As a long-term holder, I’ve had my share of false dawns. From October 2017 to mid-June 2018, for example, the share price jumped 350%.
As tends to be the case with penny stocks, this rise couldn’t be sustained. A lack of news on contract wins, capital raises and the global pandemic led the shares to fall to below 2p in March 2020.
Based on this performance, I wouldn’t rule out more volatility. Yes, having A$47.7m of cash at the end of June suggests SEE is a far less risky proposition than it was a few years ago. However, support could quickly disappear if markets wobble on news of a slowdown in economic growth.
Investors also need to be aware that talk of “new business wins” will only work in the company’s favour for so long. At some point, the market will need to see the evidence. There’s also a question mark over just how much of that A$900m pipeline SEE can really snag.
Notwithstanding these concerns, I think this penny stock is one that might trade for over a pound eventually. In fact, the huge growth opportunities for eye-tracking technology make me wonder if SEE’s share price could climb even higher than this already-lofty target.
By luck or skill (probably more of the former), I’ve been right on a few penny stocks in the past. While it’s always wise for me to maintain a diversified portfolio, I’m hoping this may be the case again here.
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Paul Summers owns shares in Seeing Machines. The Motley Fool UK owns shares of and has recommended Qualcomm. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.