The City expects explosive growth in earnings from this almost-penny stock

It’s rare to find earnings predictions as robust as those for this not-quite-a-penny stock, so I’d research and consider it now.

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With its share price near 39p (24 May) Gaming Realms (LSE: GMR) has a market capitalisation of around £115m – just above the threshold of £100m for penny stocks.

However, for adventurous investors with a higher risk appetite, the firm’s growth estimates are worth considering.

City analysts have pencilled in a surge in earnings of just over 24% for 2024 and more than 32% for 2025.

An optimistic outlook

Accelerating earnings like that are rare. Read most how-to books focused on growth investing and that’s what many previously successful investors have searched for – earnings getting bigger by ever-increasing percentages.

Quite often we see the figures the other way around with the biggest percentage increase in the nearest forward-looking period and then a decline in the percentages.

No business can keep up earnings acceleration indefinitely. But when it’s happening, we sometimes see the biggest share price gains too.

The business develops, licenses and distributes mobile-focused real money and social gaming content. It has operations in the UK, US, Canada and Malta.

In April’s full-year results report, the group posted some impressive numbers and delivered an optimistic outlook statement. Chief executive Mark Segal said the company is seeing “growing demand” for its Slingo portfolio in the international igaming markets.

Progress includes licensing games into 20 regulated markets and launching with 44 partners in 2023. The company has 75 live games, Segal said,“which demonstrates the scale of our content licensing business”.

Back then, the company had seen a “promising” start to 2024, with 14 new partners secured already, and new Slingo games “driving new players to Slingo”.

With such momentum, Segal said the directors are “excited” to continue delivering further game launches, partner deals, and an expanding global footprint. For example, there are planned launches for West Virginia and Greece.

From zero to hero

The business is performing well and that reflects in recent share price progress:

However, in 2019 and 2020, the business was loss-making, suggesting the presence of cyclicality in the industry.

There’s risk in that situation for shareholders. On top of that, it’s possible for the company’s offering to fall out of fashion with gamers. So progress likely depends on constant product launching to keep the punters interested. That strikes me as a scenario in which it may be easy for the business to take a mis-step – perhaps with dire financial and trading consequences.

As if that wasn’t enough risk, the fact Gaming Realms is a small-cap business means a likely extra layer of volatility for shareholders.

Meanwhile, the forward-looking earnings multiple for 2025 is running around 11.5 when set against analysts estimates. That doesn’t strike me as being an excessive valuation given the growth expected. In fact, the company has a price-to-earnings growth ratio (PEG) of about 0.6, where less than one is often considered to be good value.

This isn’t one for widows and orphans, and there are absolutely no guarantees of a successful investment outcome. Nevertheless, I’d consider it for a risk-adjusted position (read smaller) within a diversified portfolio of stocks and shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK 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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