Chasing massive gains is a universal desire that drives investors to bet on various high-risk, high-reward assets. These can include the likes of penny stocks, cryptocurrencies, and even lottery tickets. However, in my view, penny stocks offer the most compelling risk-reward proposition. Unlike lotteries or purely speculative cryptos, penny stocks represent actual underlying businesses with growth potential. If these companies can exceed Wall Street’s expectations and deliver explosive growth, transforming a modest investment into a 10-bagger investment is certainly possible.

The current market environment presents an opportune moment to hunt for such hidden gems. Many promising penny stocks are trading at depressed valuations.

Of course, thorough due diligence is essential when traversing into the penny stock space. You need to focus on identifying undervalued businesses with minimal dilution risk, and the financial runway to sustain operations until profitability is achieved.

With that said, let’s dive into three compelling penny stocks that could potentially turn your $1,000 investment into $10,000 or more within the next two years. 

Ouster (OUST)

Ouster (NYSE:OUST) is a lidar company. The lidar industry has faced significant headwinds in recent quarters, largely due to the automotive sector’s downturn driven by rising interest rates. However, as rates inevitably decline and consumer demand for big-ticket items rebounds, the lidar market could experience a resurgence. Many companies are actively exploring lidar technology.

It is currently costlier than alternatives. But lidar’s expensive status is steadily decreasing. That could position the technology for widespread adoption as self-driving vehicles and robots become mainstream. Ouster is a standout performer among lidar stocks, and its stock price has acted accordingly. Over the past year, OUST stock is up an impressive 129%. I see significant potential for further appreciation as the company continues executing well.

Analysts anticipate Ouster will achieve profitability by 2027. If these projections materialize, you’re effectively paying just 2-times forward earnings at current levels. Furthermore, revenue is forecasted to exceed a staggering $2.2 billion by 2030 – a remarkable outlook for a company with a modest $300 million market capitalization today.

Data Storage Corp (DTST)

While less speculative than Ouster, Data Storage Corp (NASDAQ:DTST) also presents compelling upside potential, with multi-bagger returns well within reach. The company could become an attractive acquisition target, or secure major contracts. Either way, it is one of the few pure-play data center and cloud computing providers available to investors. Big Tech has a monopoly on this high-growth sector. Thus, Data Storage Corp offers a rare direct exposure opportunity to this space.

You’re paying just 17-times forward 2025 earnings for this stock. That’s an attractive entry point in my view. 

Just look at the numbers. Data Storage Corp’s CloudFirst segment achieved $13.5 million in revenue for 2023, with a net income of approximately $2.6 million and adjusted EBITDA of $3.8 million, reflecting a robust 28% EBITDA margin. The company’s flagship segment contributed $10.4 million in revenue, with net income of around $28,000 and over $400,000 in adjusted EBITDA, marking a substantial $1.8 million swing from the prior year’s $1.3 million loss.

These impressive margin expansion trends bode well for Data Storage Corp’s organic growth trajectory going forward. The stock could deliver outsized returns as the data center market continues growing.

Applied Digital Corporation (APLD)

Applied Digital Corporation (NASDAQ:APLD) shares similarities with Data Storage Corp as a data center and AI play, but with a unique twist – its current concentration in serving the crypto mining industry. While Applied Digital markets itself as an AI and data company, a significant portion of its revenue currently stems from renting out its data centers to cryptocurrency miners.

However, I view this exposure as a positive differentiator. Following the recent Bitcoin (BTC-USD) halving event, crypto miners are aggressively expanding their mining footprints, as they now require double the computing power to mine the same amount of Bitcoin. This dynamic directly translates into increased business opportunities for Applied Digital.

Moreover, this is not merely a blockchain play. The company has strategically repositioned itself as an AI contender. It has partnerships with industry giants like Dell (NYSE:DELL), Nvidia (NADSAQ:NVDA), Goldman Sachs (NYSE:GS), and JPMorgan (NYSE:JPM). Plus, its Sai Computing brand has cloud services for AI applications, with more contracts already secured. Applied Digital has also expanded its high-performance computing (HPC) hosting capacity.

Analysts forecast this company will approach breakeven by 2026, accompanied by triple-digit revenue growth projections. The company’s revenue is expected to soar from $83 million in 2023 to an impressive $505 million by 2026. I wouldn’t be surprised to see profitability as early as 2027 with this kind of growth trajectory.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

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.