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Penny stocks have the potential to offer investors some serious capital appreciation. Yet there’s also the risk that a small company never gets off the ground, or even goes bust. Therefore, being selective in which firms to invest in is really important. After considering analysts’ opinions, one stock has caught my eye.
An attractive business model
I’m talking about Gaming Realms (LSE:GMR). The current share price is 31p, but analysts have a positive outlook for the company. Based on the three analysts with a rating, all are forecasting strong gains in the coming year. Peel Hunt has the highest target price at 60p, with Investec the lowest at 56p. In theory, if the stock did reach 60p, it would almost double an investor’s money based on the current price.
Part of the reason for this outlook is the highly scalable, high-margin business model. Gaming Realms is a gaming content developer and licensor for other businesses. It creates games and then sells them on. This means that, once a game is built, each new partner adds recurring revenue at minimal extra cost.
This bodes well for the coming year because North America is now the largest market. The full-year results should be out shortly, but the latest annual accounts showed this geography accounted for 54% of content licensing revenue. I expect this has grown and will only increase further based on the fact that more US states are likely to legalise online gambling.
A dip to consider buying
Some will look at the 17% fall in the stock over the past year and be concerned. This is mostly down to new UK gambling stake limits, which have negatively impacted licensing revenue in this market. Back in September, half-year results showed overall revenue increased by 18%, but the UK market fell by 13%.
Of course, this remains a risk going forward, but I believe continued international expansion will help offset it. In fact, the UK could end up being a relatively small part of group revenue in the years to come. This is especially true if the planned push into Brazil and British Columbia goes well.
As a result, some may see now as a good opportunity to buy the stock at a low level. The price-to-earnings (P/E) ratio is 10.37. When I compare this to the average P/E ratio of the FTSE 100 at 18, it could be used to suggest the stock is undervalued.
As with any penny stock, caution is needed. Volatile share price movements make it hard to keep emotions under control. However, with a market cap of just £88m, Gaming Realms could rally significantly without becoming overvalued if its expansion abroad starts to yield financial results.
I won’t be buying the stock purely on ethical grounds, as I don’t want to hold companies associated with gambling. However, if investors don’t have the same concern, it could be a stock to consider.
