Penny stocks with promise! Could one of these little UK tech companies be the next big thing? 

I’m considering the prospects of two lesser-known telecoms penny stocks that are undervalued and have lots of growth potential.

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Penny stocks aren’t for everyone. They’re usually low-revenue companies with very small market-caps. So the price is more prone to volatility, making them a high-risk, high-reward investment. But it can pay off to take a bit of a risk now and then.

Even Amazon was a penny stock at one point!

Today, I’ve identified two undervalued micro-cap shares I feel are worth considering. Could they be the next big thing?

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BATM Advanced Communications

BATM Advanced Communications (LSE: BVC) is a relatively small business that develops cybersecurity, diagnostics and networking products for healthcare, government and military agencies. It’s a fairly simple business but one I believe has growth potential. 

From military applications to laboratories and agriculture, there’s high demand for its products in today’s digitised world.

The company enjoyed a huge boost during Covid by developing home testing kits in partnership with Israeli diagnostics firm Novamed. But sales soon tapered off rapidly, wiping 85% off the share price since an all-time high of 140p.

Created with Highcharts 11.4.3Batm Advanced Communications PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

It’s now unprofitable but has a good price-to-book (P/B) ratio of 1, lower than the UK telecoms industry average of 1.9. It holds a fairly decent amount of cash and $116m in equity with only $5m of debt, so its balance sheet looks good.

During 2023, revenue increased from $116m to $122m and is expected to grow to $143m by the end of this year. If it does, the company should become profitable within the next six months. I expect that would give the share price a boost.

However, with headquarters in Israel, the company faces operational risks. Conflict in the region could lead to supply and demand issues or limited financing options. That’s something worth keeping an eye on.

Still, I think it’s promising. Should a resolution to the conflict be found, it’s positioned well for growth.

Calnex Solutions

Calnex (LSE: CLX) designs instruments for testing telecom networks and data centres around the world. Some of its customers include Apple, Samsung, Huawei and AT&T.

Earlier this year, it ended a 12-year sales partnership with Spirent which accounted for much of its revenue. The decision came after Spirent accepted a £1.2bn takeover deal from US firm Keysight Technologies, which makes similar products to Calnex. The share price crashed heavily on the news but has recovered 18% since this year’s low.

In June, the company participated in a successful demonstration of a new low-cost 5G mobile capability called xHaul. The technology has several potential use cases in the development of next-generation mobile networks like 6G.

Calnex is only barely profitable, bringing in a meagre £40k worth of earnings the past year. Revenue and income both fell considerably in its latest earnings report. Still, it has no debt and is in a stable financial position. It also has a decent P/B ratio of 1.7, just below the industry average.

With new sales partners picking up its products, the company has decent growth prospects. It’s undervalued by 52% based on future cash flow estimates and earnings are forecast to grow 72% a year.

It might need some time to become the ‘next big thing’ but I like where it’s headed.

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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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Apple. 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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