We recently compiled a list of the 10 Best Technology Penny Stocks to Invest in Now. In this article, we are going to take a look at where Telos Corporation (NASDAQ:TLS) stands against the other technology penny stocks.
According to the U.S. Securities and Exchange Commission (SEC), a penny stock trades for less than $5 per share. Penny stocks are often associated with growing companies with smaller market caps, limited cash flow, and restricted resources. However, it allows the investors to reap benefits from the long-term growth of the company, though these stocks are cheap to invest in they carry a greater risk of loss to the investors.
A higher level of volatility and lower liquidity sets them apart from regular stocks. In other words, higher volatility suggests that investors should expect a drastic change in prices in a given period, resulting in a potential gain or loss. Penny stocks may confuse an investor due to speculations and an inherent uncertainty in gauging its price fluctuation and therefore, these securities are suitable for investors that have a high tolerance for risk.
In addition, a low level of liquidity indicates that these stocks are difficult to sell because there may not be enough potential buyers available. However, not all penny stocks are the same, a diligent investor needs to find stocks that may be undervalued by the market but have the upside potential of growth in the future.
Similarly, there are plenty of good quality penny stocks in the technology sector that are suitable picks for investors looking to invest for long-term growth returns. Before discussing the list, let’s first explore the growth of the technology industry over the past years:
The year 2021 was a memorable one for the tech industry as COVID-19 accelerated digital transformation across enterprises and the demand for remote-work-related hardware and software increased considerably. Moreover, the shortage of semiconductors made headlines as chip manufacturers could not keep up with the surge in demand. The global IT spending grew nearly 10% compared to the previous year.
The technology sector faced challenges in the past two years due to high interest rates, elevated inflation, and considerable macroeconomic and global uncertainties like supply-chain disruptions amid Russia’s invasion of Ukraine. These events contributed to softening of the consumer spending, lowering demand, and reduction in the workforce in 2022. The headwinds continued in 2023 with the downsizing of the labor force and a slight weakening of consumer spending.
Looking forward, economists have assessed a lower risk of recession and tech analysts are optimistic that the tech industry can make a comeback with modest growths in 2024.
Role of Gen-AI in the uplift of the Technology Industry:
Generative AI is a form of machine learning that uses patterns in training data to generate new text, video, images, code, or music that can potentially be indistinguishable from what humans can create. Improvement in transformer-based neural networks in language models has enabled an AI boom in the industry, one such example is Chatgpt.
Companies are integrating AI into their day-to-day operations, and executives across the globe are recognizing the importance of AI in organizing data. According to a forecast by Bloomberg Intelligence, the generative AI market is projected to grow at a CAGR of 42% by 2032 and reach a market size of $1.3 trillion in 2032 from $40 billion in 2022.
Historically, the demand for semiconductors has been largely driven by mobile computing and its use for manufacturing processor chips. However, at present, we witness a novel source in the form of Gen-AI that is accelerating the demand for semiconductors. According to research, the demand for powerful semiconductors could boost the sales of the semiconductor chip industry to $1 trillion by 2030 from $500 billion today.
In addition, the software development service industry is a formidable market with high growth potential for small companies. According to a report by Cognitive Market Research, the global software development service market size was $409.2 billion in 2022 and is projected to grow at a compound annual growth rate of 10.5% from year 2024 to 2031.
Our Methodology:
To compile this list of the 10 best technology penny stocks to invest in, we analyzed Insider Monkey’s database of hedge fund sentiment of 920 elite hedge funds and their holdings tracked at the end of the first quarter of 2024. To draft this list we filtered tech stocks trading under $5 with a price-target upside of over 30%, and 50 – 70% of shares owned by institutions. We ranked those stocks based on the number of hedge fund holders and then arranged the list based on the ascending order of hedge fund sentiment towards each stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A senior IT executive leading a highly skilled team of professionals in a modern tech office.
Telos Corporation (NASDAQ:TLS)
Number of Hedge Fund Holders: 22
Telos Corp. (NASDAQ:TLS), is a business that creates cutting-edge technology designed to provide security solutions. The company offers solutions for identity management, enterprise security, safe mobility, cyber risk management, and compliance. It offers a web-based software program for allocating traffic for organizational messages.
In Q1 2024, the company delivered $29.6 million in revenue, reflecting outperformance from Security Solutions which generated 63% of the company’s total revenue versus 56% in Q1 2023.
Revenue was up $600,000 compared to the company’s guidance range of $28 million to $29 million. In addition, the company reported an EPS of $-0.08 beating the expected EPS of $ -0.11. The firm has $93.92 million in cash and $11.60 million in debt, putting a net cash position of $82.31 million or $1.15 per share.
Outperformance in Security Solutions was primarily driven by effective cost management on fixed-price contracts. The platform delivered $18.6 million in revenue which was above the company’s top end of the guidance range with modest growth in all lines of business.
On the other hand, Secure Networks generated a revenue of $11 million in line with the top end of the company’s guidance. Moreover, the gross margin of $11 million, although slightly down from $13.5 million in Q1 2023, was still 37% and managed to outperform guidance of 34.3%. The improvement in gross margin was a result of better-than-expected utilization of labor and an efficient management of fixed-price contracts.
In the last quarter, the company announced that Telos prime partners received awards for new programs worth $525 million for Telos’ Security Solutions business for the next 5 years.
However, protests from incumbents and other bidders are common in awards of such a magnitude. Therefore, the finalization of such awards is subject to the resolution of protests which is expected by the second quarter based on the typical protest timelines. A favorable outcome of these protests can finalize these awards and is expected to ramp up the revenue in 2024.
In the past year, the company has put forth strong growth as one of the leading information security technologies. The share price has soared over 79% in the past year.
Since 2023, Telos Corp. (NASDAQ:TLS) has won positions on five new federal contract vehicles. This includes a strategic vehicle through which the U.S. Marine Corps will procure modern state-of-the-art capabilities for telecommunications and network infrastructures and employ these solutions in all Marine Corps bases, camps, stations, and posts globally.
In short, these five federal contract vehicles are set to provide Telos Corp. (NASDAQ:TLS) with the market access to compete and expand its share in the novel business opportunities that in aggregate present a $12 billion addressable market.
In addition, last year the Defence Information Systems Agency (DISA) and Telos Corporation inked a five-year contract to support report and critical information management for the agency. As per the agreement, Telos would process and distribute the agency’s data via its Automated Message Handling System (AMHS).
The US Department of Defence as well as foreign partners, such as the military services, joint chiefs of staff, combatant commands, intelligence communities, and other defense organizations, use AMHS as an organizational messaging solution.
Furthermore, the company’s Xacta business, a cyber risk management system has recently won awards from several key customers like the U.S. National Geospatial Intelligence Agency, the U.S. Defense Intelligence Agency, the U.S. Department of Energy, the U.S. 16th Airforce, and a leading cloud-computing company. All these positive developments if managed and delivered efficiently can provide catalysts to derive growth in the years to come.
However, this anticipated growth is subject to some factors like the timely delivery of agreed services depending on operational efficiency. Most importantly, the protests can delay these contracts, for now, the company has anticipated a reduction in revenue in the second quarter. In addition, an adjusted EBITDA loss with a range of $6 million to $8 million is expected in the coming quarter.
In Q1 2024 Earnings Call Transcript on May 10, 2024, The Chief Financial Officer of Telos Corp. (NASDAQ: TLS) gave the following statement while discussing the company’s outlook in the next quarter:
“For the second quarter, we expect revenue in the range of $25 million to $28 million and an adjusted EBITDA loss of $8 million to $6 million. We forecast Security Solutions revenue to be down high single digits to up mid-single digits percent year-over-year, primarily driven by a non-recurring perpetual license sale in the second quarter of 2023, offset by growth in TSA Precheck in 2024. We forecast secure networks revenue to decline low 40% to mid-30% year-over-year due to the ongoing reductions in backlog that we expect to persist sequentially throughout the year. Our second quarter guidance, combined with our first quarter reported revenue, implies first-half revenue of $54.6 million to $57.6 million, and compares favorably with the approximately $55 million of first-half revenue that we outlined in the 2024 modeling inputs provided in the appendix of our fourth quarter earnings presentation. Overall, we expect total company revenue to return to sequential growth in the third or fourth quarter, subject to favorable resolution of protests.”
According to Insider Monkey’s database, 22 hedge funds were invested in Telos Corp. (NASDAQ:TLS) and holdings were valued at $43.83 million.
Masters Capital Management managed by Mike Masters is the largest stakeholder with total shares worth $12.48 million.
Overall TLS ranks 5th on our list of best technology penny stocks to buy. While we acknowledge the potential of TLS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TLS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.