Some of the most exciting growth opportunities in the stock market are penny stocks. These are companies that have market capitalisations below £100m and share prices below £1.
Although they add considerable volatility risk to my portfolio, I’ve been looking for some of the best penny shares to buy. I don’t want to be too exposed to smaller companies, but I do think they could potentially provide a handy boost to my returns if I choose the right ones.
One stock that currently trades under 31p with a market cap just shy of £90m is Gaming Realms (LSE:GMR), a mobile games developer, licensor, and distributor. Here’s why I think this business has a bright future.
Slots and Bingo!
Gaming Realms focuses on the B2B market for real money and social games. It has long-term relationships with a range of big names in the gambling industry including 888 Holdings, Flutter Entertainment, and DraftKings.
The jewel in the firm’s intellectual property crown is Slingo, a 30-year old game that combines slots and bingo. In FY22, the company added 12 new games to its Slingo Originals portfolio, bringing the total to 65.
Business has been good over the past year and the Gaming Realms share price has jumped 23% in 2023.
Highlights include a 27% revenue increase in FY22 to £18.7m and a 34% rise in EBITDA before share option and related charges to £7.8m.
The company’s revenue compound annual growth rate is nearly 39.5% for the 2019-22 trading period. Plus, the group turned a healthy pre-tax profit of £3.5m last year — a 224% increase on FY21.
North American expansion
Perhaps the most exciting development for the company is the potential for growth in its licensing business across the Atlantic. North America is the firm’s largest territory for content licensing.
It recently launched in Ontario, Quebec and Connecticut, boosted its market share in Michigan and Pennsylvania, and continues to expand its presence in New Jersey — the first US state the company entered, back in 2017.
The regulatory environment in the US is improving for iGaming companies. Some analysts expect the US could be the world’s largest sports betting and iGaming market by 2026. Gaming Realms is in pole position to benefit from this trend.
A risky industry
However, this is a challenging sector to be in. The approach to regulation in many jurisdictions is in a constant state of flux. This exposes the company to the possibility of hefty fines if it falls foul of the rules.
What’s more, the firm’s prospects could quickly change if lawmakers in key territories decided to take a more stringent approach towards real money games.
Plus, some people may have moral concerns about investing in a company that derives its income from gambling. Accordingly, this penny stock won’t necessarily be an appropriate option for all.
Why I’d buy this stock
As things stand, I’m bullish on Gaming Realms’ growth prospects. Its progress in the colossal North American market is promising and recent financial results show the company’s investment in its intellectual property portfolio is bearing fruit.
Overall, at 31p, this stock looks like a good buy for me. If I had spare cash, I’d add it to my portfolio today.
