So I Invested in a Penny Stock… (2024)

I did something I vowed to never do: I invested in a penny stock.

Anyone who knows me and my opinions on investing knows I am a relatively conservative investor. I don’t typically invest in individual stocks outside of my company’s employee stock purchase plan.

For whatever reason, though, I felt compelled to invest in a penny stock.

Anyone who has dabbled in penny stocks knows it typically doesn’t end well. These stocks have low market capitalization for a reason: they typically are either more of a start-up in nature or are a business on the decline.

Because investing in a penny stock is not something I typically do (or advise others to do) I feel compelled to explain myself. I’ll share a few reasons why I made the investment and why I think it could be a big winner long-term.

Mandatory Full Disclosure: I own shares of IZEA. These opinions are my own. Everyone should do their own research before investing in IZEA or any other investment.

The company I invested in is IZEA. IZEA is an advertising company that focuses on social sponsorship. In other words, they match up publishers with advertisers. If you’ve ever seen a “sponsored tweet,” IZEA likely brokered the deal. They broker blog posts and other forms of social media as well. Here’s an example of a post on this blog that was brokered by IZEA.

At the time of this writing IZEA trades for less than $0.50, giving them a market cap of approximately $25M. They had $8.3M of revenue in 2015.

Now, before you jump to the comments to berate me for making a poor investment, allow me to defend myself by sharing a few reasons I think IZEA is undervalued.

1) They have no debt

This point is pretty straight-forward: they literally have no debt on their balance sheet. No creditors whatsoever.

2) They have $6M in cash

Even if IZEA somehow completely collapsed tomorrow, they would have $6M that investors could divvy up. This is assuming they get $0 from selling off other assets.

3) Positioned in a growth industry

One of the most promising things about IZEA is the fact that they are in a growth industry. The billions a year spent on advertising by companies is slowly shifting to digital. IZEA is positioned to profit off of this transition, especially as more and more companies give social sponsorship a chance.

It’s important to note that IZEA isn’t just working with small or mid-size businesses. They continue to bring on huge clients like Nike that are household names – and that have huge advertising budgets.

4) A platform that can capitalize on volume

IZEA has a relatively new platform that allows for linking of Twitter accounts, blogs, instagram accounts, and virtually any social media platform out there (even Vine). This platform is an automated “match-making” engine that can profit off of higher volumes. It’s not like a traditional sale where you need a live person brokering each and every sale. For the most part, the manpower IZEA needs to coordinate a 100 sponsored tweet campaign is the same as the manpower they would need to coordinate a 10,000 sponsored tweet campaign.

I personally think the platform – which has hundreds of thousands of publishers using it – is a huge asset in and of itself that is not currently reflected in the stock price. Which leads me to my next point…

5) IZEA is an acquisition target

IZEA is an acquisition target because of the unique brand, platform, and business they’ve created. Huge tech companies are constantly looking for new revenue streams and IZEA is clearly a strong candidate for acquisition.

The acquisition may not happen this year, next year, or even within the next few years, but it’s hard to argue that the brand and business they are building isn’t desirable for a bigger tech or advertising company.

6) Leadership Team

Ted Murphy is the CEO of IZEA and Ryan Schram is the COO. I’m a finance guy so I can’t help but point out they have a great CFO in LeAnn Hitchco*ck as well. Ted founded the company in 2006 and many would argue he is ahead of the curve. Sponsored content is becoming all the rage as you hear people speculate about how much sites like BuzzFeed can profit off of it. IZEA has been doing sponsored content long before it was sexy.

I’ve been following Ted on Twitter for a couple years now and after reading some of the earnings calls I have to say I’m 100% behind his vision for the company and where it can go. Ryan has a lot of talent in sales and operations and I’m confident he can take IZEA to the next level.

In short: they have a great leadership team and I honestly might not have invested if I didn’t buy into their vision for IZEA.

7) Low Market Cap

I invested in IZEA when it was trading around $0.31 and had a market cap of $17M. Something just felt off about that number. It seems like they have the potential to push their revenue into the $10-$30M range within the next two years. At $17M market cap they would only need $1.7M in net income to have a P/E ratio of 10 (which is a benchmark I typically use when running these sorts of analysis, though I admit it oversimplifies things).

While leadership admits that it’s staffing up for the foreseeable future to create the capacity to handle a higher and higher level of bookings and clients, I think it’s clear that the revenue growth will eventually result in some sizable income figures.

I see IZEA as eventually hitting the $100M revenue and $10M income mark. Of course, considering the business they are in and the infrastructure they have created to handle high volumes, I don’t think it’s unrealistic to expect a profit margin higher than 10%.

While IZEA is no longer sitting at a $17M market cap, I still find them an attractive long-term play. They may be a penny stock, but if you invest and stick with the company long-term it could be a really profitable play. After all, if they ever hit an annual income of $10M it would justify a market cap of at least $100M, if not more.
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So there you have it: I invested in a penny stock and lived to tell about it. This investment won’t make sense for a lot of people out there, but for someone who wants to add a bit of risk to their portfolio with an opportunity for potential big gains, I think IZEA could make a lot of sense.

Do you think I’m crazy for investing in a penny stock? Have you ever invested in a penny stock or would you ever invest in a penny stock?
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Photo by frankieleon