A penny stock can be defined as a company with a market-cap below £100m and a share price below £1. There are plenty of shares that fit this bill, but it doesn’t mean all are undervalued gems that could make an investor rich.
After some careful research, I think I’ve found one that could be worth consideration.
Details of the business
I’m talking about 1Spatial (LSE:SPA). With a market-cap of £74m and a share price of 66p, it certainly ticks the boxes. Over the past year the stock’s up 41%.
The business is a UK-based technology company specialising in Location Master Data Management (LMDM) software and solutions. It might sound confusing, but it basically helps organisations ensure data accuracy. The software that 1Spatial sells helps to validate and manage location-based data. The word spatial refers to occupying space, hence the business name.
Naturally, the scope of operations lends itself to making use of artificial intelligence (AI). One of the smart ways already being used is taking an image of a place and turning that into location data. This cuts out the manual human process and in theory will allow the data to be more accurate without human error.
AI models can also process structured location data to perform analytics in a much quicker way than humans can. This is something that can help 1Spatial to become more efficient in operations, but also to keep costs down.
Why I believe it could do well
I think investors should consider owning the stock based not just on the AI capabilities but also the recent contracts that have been won. In September it got the renewal of a multi-year deal with the National Public Authority in France. This is valued at £1.26m over four years.
During November the firm announced a five-year deal with the Department of Agriculture in the US, worth £1.11m. In both of these deals, it provides solid future reoccurring revenue, which is very appealing for investors.
If the company can keep following this business model with more contacts coming through, it could easily scale at a very fast pace next year. Given the boost to revenue and profitability that these provide, I’d expect to see the share price more materially higher as a result.
Risks to note
Some flag up the large contracts as a potential risk. 1Spatial has a small number of clients, based with high-value key contracts. If it doesn’t get one renewed, it could have a big negative impact on finances. This is true, but I feel that as the business grows and takes on more clients, this risk can be diversified.
As small companies, penny stocks like 1Spatial also carry a higher level of risk in general. Yet I feel the potential reward here’s high. Therefore, I feel it’s worth considering for an existing diversified portfolio looking for growth.
