Investing in penny stocks is a volatile experience. After all, these are tiny enterprises with everything to prove. And over-excitement, as well as over-pessimism, from investors is what leads to their unstable valuations.
In most cases, young businesses fail, even the ones that manage to make it to an IPO. But every so often, a diamond in the rough emerges. And providing that investors are accurate in their assessment, investing in the early days of a growth story can lead to explosive wealth generation.
Disrupting banks with fintech
The list of fintech companies is seemingly endless. And plenty are residing within penny stock territory. While most seem to be focused on digital payment solutions, Argentex (LSE:AGFX) targets a niche and underserved market – corporate foreign exchange.
The group is a broker for trading spot, forward, and options contracts. These are specialised financial derivatives often used by businesses with international operations to mitigate the impact of fluctuating currency exchange rates.
Traditionally, the banking sector has provided such services, and continue to control an estimated 85% of the global market share today. The problem is these services are prohibitively expensive for smaller companies. That’s where Argentex steps in.
Instead of following the usual fee structure, the group makes its money through the bid-ask spread on each transaction. As a reminder, that’s the difference between an asset’s buying and selling price.
While this difference is often small, it starts to add up when scaled by thousands of transactions each month. And with management now starting to encroach on new market opportunities with its own alternative banking platform, investors could be looking at the start of a disruptive journey for the global corporate banking industry.
One of the best penny stocks to buy?
Looking at Argentex’s latest results, the group continues to fire on all cylinders. In 2022, total revenue grew by 54% year on year, reaching a record £50.4m. This was driven by a combination of 187 additional clients using its platform during the period, as well as a 45% increase in average revenue per client.
Operating profits were down for the year. However, upon closer inspection, this appears to be self-inflicted. Management is currently busy increasing headcount to accelerate the development of its alternative banking platform as well as its expansion into the Australian and European markets.
In the meantime, the balance sheet remains debt-free and flush with cash. With that in mind, there don’t appear to be any financial restraints holding the company back. However, there are, of course, risks.
The alternative banking platform is still a relatively new addition to the group’s revenue stream. And consequently, almost all of this penny stock’s income stems from forex trading activity. This is notoriously cyclical.
During periods of economic instability, volatility within exchange rates ramps up demand for Argentex’s services. But when stability returns, this could flip, making it increasingly difficult for the group to maintain a rapid growth profile.
Having said that, in the long run, demand for currency exchange risk management isn’t likely to disappear anytime soon. And with its valuation sitting at just 12 times forward earnings, Argentex looks like a bargain opportunity to tap into a disruptive growth opportunity.
