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Is this penny stock 1 to buy or avoid? Here’s my verdict!

British Pennies on a Pound Note
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Penny stocks are considered high risk and high reward. One penny stock possibility I am thinking about is Idox (LSE:IDOX). Could it be a good growth pick for my portfolio or should I avoid buying shares? 

Software provider

Idox is a UK-based firm that specialises in digital solutions, specifically information management software. Its software aims to simplify complex tasks and operations and effectively manage information in an organisation.

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With a customer base that spans the UK and internationally, Idox employs over 600 people with operations in eight countries. Some of the sectors it sells into include governments, healthcare, transport, and engineering and construction.

Penny stocks are traditionally identified as those that trade for less than £1. Today, as I write, Idox shares are trading for 73p per share. At this time last year, shares were trading for 49p, which represents a 48% return over 12 months. It is worth noting that the share price has surpassed pre-pandemic market crash levels.

Currently, Idox shares are trading at close to all-time highs. The Idox share price did reach similar levels back in 2018 before profit warnings and a few roadblocks resulted in a share price drop.

For & against

In order to make a decision regarding Idox’s investment viability, I have compiled a short for and against argument.

FOR: Idox has a history of acquisitions. When I am reviewing a firm’s investment viability, I am often buoyed by any firm that acquires other businesses to enhance its offering and profile. For example, Idox has announced two acquisitions in the past six months. Both of these involve swallowing up smaller firms that offer similar products or boost their current offering. 

AGAINST: Unfortunately, Idox has had a few problems in the past, looking back to 2018. It had to undertake a restructuring when there were issues with delayed contracts, accounting issues with revenue recognition, and an ill-fated acquisition. I often refer to positive historic track records so I must also note any history of negatives. Businesses don’t always learn and past mistakes can be repeated so I must be wary of this. Penny stocks can often have chequered pasts so it is not uncommon to see this.

FOR: Referring to more recent performance, it seems that Idox’s problems could be a thing of the past. Both 2019 and 2020 saw a rise in revenue and gross profit year on year. The most recent trading update was a half-year report for the six months ending 30 April was released in August. Overall, it was encouraging. Revenue increased by 4% (excluding its recently disposed content businesses as it focuses primarily on software). Profit and EBITDA were also up as was net cash. It seems performance is consistent and any issues could be a thing of the past.

AGAINST: The competition in the software market is intense and it is a saturated market. My concern is that Idox is a small fish in a very large pond. Idox could be outspent and outmanoeuvred by bigger competitors.

A penny stock I should buy or avoid?

Overall, I do think Idox is a good growth pick. I believe it could continue its upward trajectory. I would be willing to add a small amount of shares and keep a keen eye on developments right now.

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Jabran Khan has no position in any of the shares mentioned. 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.

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