1 penny stock I’d buy today while it’s 63p

This penny stock’s down 70% since last March, yet could be set for a big comeback as the firm rebuilds revenue over the next couple of years.

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Since March 2023, the Zoo Digital (LSE: ZOO) share price has swung lower like a monkey on a vine. It’s gone from 207p back then to just 63p today, giving the firm a £61m market-cap and penny stock status.

Here’s why I think this share could be poised for a rebound from its bearish downtrend.

A plot twist

For those unfamiliar, Zoo Digital provides cloud-based localisation services for the entertainment industry. That is, it specialises in subtitling, dubbing, and captioning to adapt TV and film content for global audiences.

The firm collaborates with a worldwide network of 12,000+ freelance workers, helping the likes of Netflix reach a wider international audience. It has production hubs in strategic global locations to ensure a 24/7 service offering.

Up until FY24 (which ended in March), revenue growth had been exceptional, surging from $28.6m in FY18 to $90.3m by FY23. This culminated in an $8m net profit, a significant improvement over previous years.

Then, like in many movies, a plot twist suddenly derailed the progress. And ironically enough, this came in the shape of the 2023 Hollywood strikes involving actors and writers, which brought the production of new content to a screeching halt.

As a result of this disruption, the firm expects FY24 revenue to be much lower (around $40m), with a fairly hefty EBITDA loss. Anticipation of this caused the elephant-sized sell-off in Zoo Digital shares.

Rebuilding revenue

But there may be a happy next episode to this story. That’s because the Hollywood strikes ended in November and in a May trading update, the company said customer demand had continued to recover.

March recorded the highest invoicing since April last year (when the strikes really got going). This was driven by an accelerated pipeline, with the expansion of work persisting into April.

Plus, the firm was recently selected as a primary vendor by a major film and TV distributor, securing significant orders for language dubbing and subtitling. And it’s now opened dubbing studios in Milan.

In the update, Zoo Digital said: “With market commentators forecasting a return to 2022 levels of entertainment output in 2025, the Board continues to see opportunities to rebuild revenues following the significant industry disruptions of FY24“.

Comeback storyline?

In March, the company had a net cash position of $5.3m, down significantly from $23m in June 2023. It’s renewed its debt facilities with HSBC for an additional 12 months, amounting to $3m.

Therefore, a key risk here is another sudden disruption to the entertainment industry. That would heap further financial pressure on the firm.

Despite this risk, I think Zoo Digital might be set for a turnaround in fortunes. Revenue for Q1 FY25’s expected to be 36% higher than the same quarter last year. And together with recently implemented cost savings, the firm expects EBITDA break-even in the quarter.

Meanwhile, it continues to leverage artificial intelligence (AI) to enhance its end-to-end services. And management fully expects to return to profitable revenue growth as things pick back up.

The stock’s trading on a price-to-sales (P/S) multiple of 1.3, which is pretty low. Pair this with its 70% slump from March last year, and I think it looks very attractive. I’d invest at 63p if I had any spare cash.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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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