The technology sector consists of businesses that develop, build, and market consumer electronics, electronic components, and software. Companies in the tech sector may also provide information technology (IT) services such as cloud computing. While the best-known companies are giants like Apple Inc. and Microsoft Inc., there also are tech businesses that are classified as penny stocks.
Penny stocks typically trade at $5 per share or less. Investing in penny stocks can be especially risky and may entail higher trading costs. Therefore, investors should be careful when considering whether to invest in these or similar securities.
There is no widely used benchmark for tech penny stocks, but the S&P 600 Information Technology Sector Index is a broader benchmark for small-cap technology stocks. The index has significantly underperformed the broader market in the past year, providing a one-year trailing total return of -52.8% compared with -17.2% for the Russell 1000 Index. These market performance numbers above and all statistics in the tables below are as of Sept. 30, 2022.
Here are the top three tech penny stocks with the best value, the fastest growth, and the best performance, respectively.
These are the tech penny stocks with the lowest 12-month trailing (TTM) price-to-sales (P/S) ratio. For companies in early stages of development or industries suffering from major shocks, this can be substituted as a rough measure of a business’s value. A business with higher sales eventually could produce more profit when it either achieves or returns to profitability. The P/S ratio shows how much you’re paying for the stock for each dollar of sales generated.
Source: YCharts
- Avaya Holdings Corp.: Avaya Holdings provides digital communications services to corporations, including cloud, voice, email, video, and performance management tools. On Aug. 1, Alan Masarek became president and chief executive officer (CEO) of Avaya. Masarek was previously CEO of Vonage Holdings Corp. He succeeds Jim Chirico, who also resigned from Avaya’s board of directors.
- Diebold Nixdorf Inc.: Diebold Nixdorf provides hardware, services and software to companies. Its focus is partnering with financial institutions and global retailers to offer financial services to consumers.
- Compass Inc.: Compass is a real estate technology company and brokerage. It provides cloud-based software used by real estate agents for marketing, client service, customer relationship management, and other activities. Compass reported Q2 2022 earnings results on Aug. 15. Its net loss widened 13-fold year-over-year (YOY) on a 4% increase in revenue growth. The financial results were impacted by non-cash, stock-based compensation expenses, depreciation and amortization, and restructuring charges.
These are the tech penny stocks with the highest year-over-year (YOY) sales growth for the most recent quarter. Rising sales can help investors pick out growing startups that have not yet reached profitability. In addition, earnings per share can be significantly influenced by accounting factors that may not reflect the overall strength of the business. However, sales growth can also be potentially misleading about the strength of a business, because growing sales on money-losing businesses can be harmful if the company has no plan to reach profitability. Companies with sales growth of 2,500% or more have been excluded from our list as outliers.
Source: YCharts
- Nano Dimension Ltd.: Nano Dimension is an Israel- and U.S.-based 3-D printing company. It provides additive manufacturing electronics systems to a range of sectors, including consumer electronics, medical devices, automotive, and more. On Aug. 3, Nano announced that an Israeli court had approved its plan to repurchase up to $100 million of its American Depository Shares (ADS) over a 1-year period. Although Nano Dimension already trades on the NASDAQ through ADS, it needed the approval of the Israeli court for the buyback because of its legal status in Israel.
- Meta Materials Inc.: Meta Materials is a Canada-based developer of nanocomposite products and related materials. It designs and builds functional materials used to improve performance of 5G communications, aerospace, and other industries. Meta Materials reported Q2 2022 financial results on Aug. 9. Its net losses widened YOY as revenues more than quintupled. Meta Materials said that strong growth in both product sales and development revenue for the period.
- Phunware Inc.: Phunware provides software platforms used to engage, manage, and monetize mobile application portfolios and audiences. Its products include cloud-based mobile software development kits, audience management solutions, and related offerings.
These are the tech penny stocks that had the best returns or smallest declines in total return over the past 12 months out of the companies we looked at. Stocks with returns in excess of 2,500% have been excluded as outliers.
Source: YCharts
- Phunware Inc.: See above for company description.
- Edgio Inc.: Edgio provides a delivery network and related services that are used to distribute content over the Internet. Edgio says its products drive about 20% of worldwide internet traffic for movies, TV shows, sports, and other entertainment. The company said that it set an all-time traffic record during a live event when traffic increased 160% on Sept. 15 compared to the prior-day peak traffic.
- Infinera Corp.: Infinera supplies networking equipment, software, and related services for telecommunications service providers. Its products include optical line systems, automation software, optical transport platforms, and related networking tools.
Advantages of Tech Penny Stocks
Growth Potential: Tech penny stocks provide significant growth potential due to their micro market capitalizations and product adoption prospects. For example, in December 2021, shares in video streaming and linear TV company SeaChange International, Inc. (SEAC)—which had a market cap of just $36.86 million at the time—spiked 359% after rumors surfaced that it would merge with video-sharing social networking service Triller. Although the merger failed to eventuate, it highlights the rapid growth potential of tech penny stocks.
Smaller Investment: Investors don’t need much capital to start trading tech penny stocks. A few hundred dollars can buy thousands of shares, allowing investors to profit quickly if the price moves in their favor. For instance, a trader who invests $200 into a 5-cent stock receives 4,000 shares. If the stock doubles in price, the trader has made a 100% gain on their small initial investment. By comparison, if the trader invested the same amount in a large-cap tech stock like Apple Inc. (AAPL), they could buy only one share, making it difficult to generate significant returns on their starting capital.
Risks of Technology Penny Stocks
Less Regulation: Tech penny stocks that trade over-the-counter (OTC), such as pink sheet listings, carry significantly higher risks than those that trade on regulated exchanges. Smaller tech companies may choose to sell their shares OTC to avoid the higher costs and regulatory requirements of listing on a major exchange like the Nasdaq. Fewer reporting obligations could make it difficult to find the necessary financial information to make informed decisions before investing in these stocks. Those who trade via OTC networks should ensure that they conduct their due diligence on the tech penny stocks they invest in to reduce the chance of getting scammed.
Low Liquidity: Tech penny stocks typically trade significantly less volume than their larger-cap counterparts due to fewer market participants following these smaller companies. Lower volume can make it difficult to enter and exit positions, especially when the stock price falls sharply and traders are looking to exit their positions as quickly as possible. Insufficient liquidity can also increase trading costs through wider bid/ask spreads. For instance, a trader wanting to purchase a tech penny stock with a 50-cent to 75-cent bid/offer faces a 50% spread to execute a market order. Finally, thinner trading volumes make it easier for bad actors to manipulate the prices of tech penny stocks, which can cause sudden volatility spikes.
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