If you’re an investor with a high tolerance for risk and a desire for supersized returns, penny stocks should be at the top of your watchlist. While penny stocks are often associated with pump-and-dump schemes and companies on the verge of bankruptcy, there are some real hidden gems trading at bargain valuations that could potentially deliver astronomical returns within a few short years.
It’s not unrealistic to expect a quality penny stock to increase 10X or more within just a couple of years once Wall Street takes notice. Of course, with greater potential reward comes greater risk. Many penny stocks are more speculative in nature. But by focusing your research on profitable companies with solid fundamentals and growth drivers, you can limit the downside while keeping the upside wide open.
In my experience, if you invest wisely in a diversified basket of penny stocks, a $10,000 portfolio can realistically turn into $100,000 or more over a 5-year time. While penny stocks should only be a small part of a well-diversified portfolio, buying up shares of these hidden gems now could pay off in a very big way down the road. So let’s dive in and take a closer look at seven penny stocks!
Paysign (PAYS)
Paysign (NASDAQ:PAYS) provides prepaid card products and processing services for businesses, consumers, and government entities under the PaySign brand. Their capabilities include transaction processing, cardholder enrollment, account funding, account management, reporting, and customer service.
One area I’m particularly excited about is how Paysign develops tailored prepaid card programs for corporate incentives, payroll, and gift cards. This provides diversified revenue streams across attractive end markets. The stock has certainly been beaten down, plunging from a 2019 peak of $17.5 to a low of just $1.4 in 2020 as the pandemic took its toll. However, I believe the worst is behind us and that PAYS has bottomed out.
Shares currently trade around $4.10, which I see as an attractive entry point. In my experience, the market tends to underestimate turnaround situations like this. While EPS is expected to dip in 2024, analysts forecast a strong 50% rebound in 2025 as growth accelerates again. Revenue growth has remained resilient even through the downturn, with 18% growth expected in 2024 and 14% in 2025.
What gives me further confidence is that Paysign just reported blowout Q4 results, beating estimates by 10.7% on the top line. To me, this quarter confirms we’ve reached an inflection point and that Paysign is ready to build momentum as macro conditions improve for fintechs. Once rate cuts materialize, I expect this leaner and refocused PAYS to really take off.
LiveOne (LVO)
LiveOne (NASDAQ:LVO) presents an intriguing turnaround opportunity as demand normalizes post-pandemic. LiveOne operates a global platform for livestream concerts, festivals, and other events. As you’d expect, the stock chart looks ugly if you zoom out. With live events essentially banned for long stretches, LVO shares plunged from its pre-pandemic peaks.
However, the business has been making an impressive comeback in recent quarters. The stock is already up 50% over the past year to around $1.8 currently. And I believe LiveOne can climb much higher from here as financial performance continues improving. Losses have narrowed from $44 million in 2022 to $10 million in 2023. Analysts now forecast LiveOne to reach profitability in 2026, with revenue growth above 20% annually during this period.
Once LiveOne can consistently expand margins after achieving profitability, I think the upside is dramatic given its leadership position in live streaming. This is a small-cap stock with the potential to deliver 10X returns or more in the coming years as the live events industry gets back on track. I believe Wall Street is seriously underestimating LiveOne’s potential.
Dada Nexus (DADA)
Dada Nexus (NASDAQ:DADA) is a leading Chinese local on-demand delivery and retail platform. Dada operates two key platforms – JD-Daojia, one of China’s largest local on-demand retail platforms, and Dada Now, a top local on-demand delivery platform. Dada Now provides critical delivery infrastructure for retailers across industries, serving both merchants and individual customers.
Like the other two picks, DADA’s chart is ugly, with shares down 96% from their 2021 peak to around $2 currently. However, I see this as a huge overreaction that has created a buying opportunity. Analysts expect significant improvements as China’s economy recovers from COVID disruptions.
Dada has consistently been unprofitable, posting net losses above 20% for years. However, analysts finally forecast the company to reach profitability in 2024 after aggressive cost-cutting. If Dada hits 2025 earnings targets, it would trade at just 5x forward earnings, an absurdly cheap level for a high-growth platform leader.
Given the dramatic improvements on the horizon, I believe DADA can deliver multibagger returns from today’s depressed levels. The market has become overly pessimistic on Chinese stocks, presenting a chance to buy Dada at a bargain valuation before the next growth cycle.
iSun (ISUN)
iSun (NASDAQ:ISUN) designs, develops, and installs solar power systems, EV charging stations, and electrical infrastructure solutions. There’s no doubt this is one of the riskier penny stocks I’ve recommended, with substantial dilution over the past year.
Outstanding shares skyrocketed 121% year-over-year in Q3 2023 alone. I typically avoid profiling stocks with such unfriendly dilution. However, I’m making an exception because iSun appears to be approaching an inflection point. Losses narrowed significantly to just $2.3 million in Q3 2023, compared to $28 million in revenue.
This improving trajectory gives me hope the worst dilution is behind us. Shares are also up 83% since its November 2023 trough, potentially indicating dilution has slowed. Analysts forecast negligible losses in 2024, with profitability arriving in 2025. If achieved, iSun would trade at a mere 2x 2026 earnings, presenting sizable upside from today’s levels. While I recommend watching dilution carefully, I believe iSun could deliver outsized returns if execution continues improving.
Lesaka Technologies (LSAK)
Lesaka Technologies (NASDAQ:LSAK) is a South African fintech that I believe is poised for a major breakout as conditions improve in its home country. It provides payment solutions and transaction processing services across Africa. The stock has essentially gone sideways for five years now, trading around $4 currently.
However, South Africa’s outlook is brightening. Progress is being made on challenges like electricity shortages, high crime, and economic stagnation. With an inflection point potentially approaching, I think LSAK could rally strongly if it can break above resistance around $6.
Losses are forecast to narrow significantly in the years ahead, with profitability arriving in 2026. Any positive surprise could ignite the share price. LSAK has the potential for multibagger returns from today’s levels if execution remains solid and South Africa’s economy turns a corner. This is a classic turnaround play trading at a discount valuation.
374Water (SCWO)
374Water (NASDAQ:SCWO) is an intriguing nano-cap play on the future of water treatment and sustainability. This social impact clean-tech company provides wastewater treatment solutions using its patented SCWO technology. SCWO eliminates organic compounds, pathogens, and other contaminants.
I expect tailwinds from tightening environmental regulations worldwide. 374Water is still in hypergrowth mode, so profits aren’t on the horizon yet. However, revenue is forecast to surge from $6 million in 2024 to $55 million in 2026.
Maintaining that triple-digit growth pace could allow 374Water to reach profitability by 2027. Given the huge addressable market in water management, I believe SCWO has multibagger potential if execution remains best-in-class over the next five years. This is an ideal long-term growth story in the making.
Youdao (DAO)
Youdao (NYSE:DAO) is a Chinese online education technology company that I believe remains deeply undervalued after the tech selloff. Youdao provides online learning services, smart devices, and digital marketing solutions. As with many Chinese tech names, the stock has been crushed, down 91% from highs.
However, I think a bottom is forming. DAO has traded sideways since August 2023 as fundamentals improved. China’s economy is also starting to stabilize. With stimulus ahead, I expect an inflection point for beaten-down tech stocks like Youdao.
The company has cut costs aggressively and is forecast to reach profitability in 2025. At just 5.5x 2026 earnings estimates, I believe the risk/reward is compelling for long-term investors. Revenue growth should also accelerate to 15% annually. My one caution is the high debt load, with a cash/debt ratio of just 0.34x. However, balance sheet improvement should follow with profitability.
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.
