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A penny stock can be defined as a company with a market capitalization of less than £100m and a share price of less than £1. There are many stocks that fit these requirements, but that doesn't mean they are all undervalued gems that could make an investor rich.
After careful research, I think I found one that might be worth considering.
Business details
I'm talking about 1Space (LSE: SPA). With a market capitalization of £74m and a share price of 66p, it certainly fits the bill. Over the past year, the stock is up 41%.
The company is a UK-based technology company specializing in location master data management (LMDM) software and solutions. It may seem confusing, but it basically helps organizations ensure data accuracy. The software sold by 1Spatial helps validate and manage location-based data. The word space refers to taking up space, hence the trade name.
Naturally, the operations space lends itself to making use of artificial intelligence (ai). One of the smart ways already used is to take an image of a place and convert it into location data. This eliminates manual human process and will theoretically allow data to be more accurate without human error.
ai models can also process structured location data to perform analysis much faster than humans. This is something that can help 1Spatial be more efficient in operations, but also keep costs down.
Why do I think it could work well?
I think investors should consider owning stocks based not only on ai capabilities but also recent contracts that have been won. In September it secured the renewal of a multi-year contract with the French National Public Authority. This is valued at £1.26m over four years.
In November, the company announced a five-year deal with the US Department of Agriculture worth £1.11m. In both deals, it provides strong recurring revenue going forward, which is very attractive to investors.
If the company can follow this business model with more contacts, it could easily scale at a very fast pace next year. Given the boost to earnings and profitability these provide, you'd expect to see the share price substantially higher as a result.
Risks to take into account
Some point to large contracts as a potential risk. 1Spatial has a small number of clients, based on key high value contracts. If not renewed, it could have a huge negative impact on finances. This is true, but I feel that as the business grows and acquires more clients, this risk can be diversified.
Being small companies, penny stocks like 1Spatial also carry a higher level of risk overall. However, I feel like the potential reward here is high. Therefore, I think it's worth considering for an existing diversified portfolio looking for growth.
