Penny stocks are often defined as stocks trading under $5 per share, those with a very low price per share or market capitalization, and are generally higher-risk. Now, despite many such stocks certainly carrying a relatively high risk profile, this often is somewhat offset by higher potential returns. While many penny stocks lack fundamentals or are too speculative, some can present good opportunities, especially undervalued ones.
As we move into August, many penny stocks look particularly underpriced due to Wall Street’s obsession with AI-related stocks. Nevertheless, this AI rally may be waning, supporting the idea that smart speculative money may be looking to find its way into undervalued penny stocks.
Of course, plenty of research and careful evaluation of these companies’ financials are always advised when investing in penny stocks. For risk-tolerant investors, these three stocks offer attractive valuations relative to their growth potential.
Absci (ABSI)
I’ll start with Absci (NASDAQ:ABSI), a unique biotech company combining artificial intelligence and synthetic biology to accelerate drug creation. The company’s recent IPO saw its shares surge over to $28.50 apiece in 2021, before plunging 93% lower to penny stock levels. With the stock trading sideways over the last few months, I believe this is an opportunity to buy into the future of pharma, at a discount.
Despite the volatility, analysts believe Absci is set to post 114% revenue growth this year on the back of its groundbreaking technology. With a 45% compounded annual growth rate for its revenue through 2030, I’m confident this company’s best days lie ahead. Unfortunately, profitability isn’t expected until 2028 due to substantial R&D investments. However, a hypergrowth narrative can still benefit shareholders in the interim. Beyond the company’s stellar financial projections, what truly excites me about Absci is the tech itself.
By leveraging AI to design ideal proteins for its drug candidates, and synthetic biology to engineer bacteria to produce them, Absci has a potential game-changer on its hands. Manufacturing intricate proteins that are currently unattainable with conventional methods could revolutionize biopharma altogether. Forging partnerships with pharma titans like Merck (NYSE:MRK) validates the promise of Absci’s platform in my eyes.
Despite being very high-risk due to its early stage nature, I’m bullish on the incredible upside potential of this penny stock.
Purple Innovation (PRPL)
Purple Innovation (NASDAQ:PRPL) is a mattress company I see potential in, despite its recent challenges. The stock plunged in 2022 on the back of slowing sales, supply chain woes, and an executive shake-up. Although Purple missed Q4 earnings estimates and guidance, I believe the company’s lowered expectations provide an opportunity for the company to pole vault over them, and to a higher share price.
Though some analysts have turned bearish on Purple, the consensus price target for PRPL stock still implies nearly 230% upside on the higher end. With projections for 14.7% revenue growth in 2023, I think Purple has levers to pull for a turnaround. Beyond its growth outlook, what I like about Purple is its patented comfort technologies. Purple retains a competitive edge in this regard, at least in my view.
I see PRPL stock as undervalued, given that it trades at just 0.44-times sales compared to over 1.5-times sales for leading competitor Tempur Sealy (NYSE:TPX). With Purple’s capacity expansion and new showrooms, I expect operational leverage to improve margins progressively. In my opinion, buying PRPL stock near 5-year lows could generate sizable returns.
22nd Century Group (XXII)
22nd Century Group (NASDAQ:XXII) is an early-stage plant biotech penny stock on my radar. This company aims to disrupt the tobacco, hemp/cannabis, and wellness industries through plant-based IP and R&D expertise.
With over 200 patents covering plant genetics and nicotine regulation, I’m impressed by the breadth of 22nd Century’s IP portfolio. Beyond tobacco, I’m also excited by this company’s moves into legal hemp/cannabis. Though still speculative, 22nd Century’s first-mover advantage across multiple emerging markets is compelling.
At 0.5-times sales, with anticipated 70.3% year-over-year growth this year and 86.3% next year, the current price of XXII stock doesn’t make sense. I think the market is undervaluing the company’s long-term potential and growth prospects. Thus, I think this penny stock warrants a buy-and-hold position for investors with higher risk tolerances.
It currently has one recent Wall Street rating. With a price target of $10 per share, we’re looking at 263.6% potential upside.
Penny Stocks
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Omor Ibne Ehsan did not have (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.