It is quite clear that most penny stocks are at a crossroads right now. The market is currently recovering from the downturn we saw a few weeks back — strongly so. However, one would be wise not to cheer this recovery too much. The situation remains precarious, with the market potentially flipping its momentum again in the coming weeks and doing so quickly.
We are in the earnings season, and things can change rapidly during this crucial period. As we have seen recently, Wall Street is not content with big companies merely beating estimates. Many firms now carry exceptionally high valuations, and the market also expects exceptional performance from these companies, quarter after quarter. Underperformance by these big companies could end up dragging down the entire market.
That said, quite a few penny stocks are trading at relatively cheaper valuations, with huge upside potential. In my view, these stocks could deliver multibagger returns in the coming years. They have a more attractive risk-reward profile compared to many of the top stocks right now. The potential rewards are substantial if one can stomach the risks. Let’s take a closer look!
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Aware (NASDAQ:AWRE) is a biometrics company. Its products are mostly used for biometric identification of users. Aware’s software has been used in hundreds of deployments and is in daily operation on many thousands of workstations, servers and mobile devices globally. The company claims to have provided software solutions to the FBI and numerous financial services companies. However, it is still a very small company with a market capitalization of just $39 million as of writing. I see significant room for expansion ahead in the coming years with the data boom.
AWRE stock has been trading sideways for the past year and a half, so there is an established floor here, which provides a lot of safety from downside risk. Recurring revenue is 71% of the company’s total revenue, so that’s another layer of safety.
Moreover, the upside potential here could be massive, as the biometric-as-a-service market is expected to grow from $4.7 billion in 2024 to $36.6 billion in 2031 with a 29.3% CAGR. The company grew revenue at just 3% YOY in Q1. However, it expects around 23% recurring revenue growth and double-digit total revenue growth for the year. The biometrics market is still accelerating its momentum, so I have high hopes going forward.
Data Storage (DTST)
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I have written about this company many times before, and it is one I think could follow in the footsteps of SMCI if it delivers good growth in the coming quarters. The stock may be slightly above or below $5 by the time you read this, so I apologize for any discrepancy between the title and DTST’s price!
Data Storage (NASDAQ:DTST) is a data recovery and data center business. The stock is also down around 30% from its peak, but I think if the rally restarts from here, we could see Data Storage Corp deliver multibagger gains. The company is still small and has a market cap of just $35 million.
The growth here hasn’t been stellar, but I expect it to accelerate going forward due to the data boom. Revenue hit a record $25 million in 2023, up 5% year-over-year. Gross profit margin increased to 38.4% from 33.9%. Moreover, net income was $382,000 compared to a $4.4 million loss in 2022. The company also had $12.7 million in cash and marketable securities — not too shabby for a company of this size.
What makes me really bullish is that the company has been generating a lot of cash flow recently.
Plus, the remaining contract value here was $26.7 million as of Q4, with over $8 million in outstanding proposals for new contracts. That is quite a big amount for a company of this size, and its international expansion efforts have been underway, which can drive a new wave of growth.
Applied Digital (APLD)
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Applied Digital (NASDAQ:APLD) is mainly a blockchain stock. However, this isn’t your typical crypto-mining company. It operates in a unique niche. What Applied Digital does is it rents out its data centers to crypto mining companies.
The Bitcoin (BTC-USD) halving happened recently, and I believe this is a great time to buy APLD before we see any breakout. Many crypto mining companies are expanding their mining operations, as the halving essentially halved all their rewards from Bitcoin mining. As such, these crypto-mining companies would have to mine with twice as much power for the same amount of BTC in rewards. Thus, this only means more business for Applied Digital. The company is primed to profit from the industry’s increasing scale and demand for computing power.
Moreover, this company is quickly shifting towards high-performance computing and AI. Diversification is key in today’s rapidly evolving tech landscape. Analysts expect revenue to rise from $151 million to $505 million from 2024 to 2026, along with EPS nearing breakeven levels by 2026.
If these projections prove accurate, Applied Digital could be on the cusp of a major growth phase.
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On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.