In the wide world of investments, the terms ‘large cap’ and ‘penny stocks’ don’t often go together.
One describes an established, highly valued company. The other is an unproven, high-risk gamble.
Moreover, large caps and penny stocks generally attract two very different sets of investors. The former prefers stability and steady growth while the latter seeks quick profits.
Is it even possible for these worlds to collide?
It’s very rare, but it does happen.
Stocks with low prices and high market values usually fall into one of two buckets: 1) companies that once thrived but have fallen way out of favor with the market; often the products they offer become obsolete or the competitive threat overbearing, and 2) companies that lack the fundamentals to support a ‘normal’ share price but are extremely popular with investors; recent IPOs often fall into this category.
Using the thresholds of $10 billion for market cap and $5 for share price, only a trio of U.S.-listed stocks qualify as large-cap penny stocks. In other words, just one in 2,000 stocks match these unusual criteria.
Are they overhyped? Or underappreciated?
Is Sirius XM Stock Worth the Risk?
Sirius XM Holdings, Inc. (NASDAQ: SIRI) falls into the first bucket. The company, synonymous with satellite radio rode the dot com wave of the late 1990s. Then, when the bubble burst, a $60 share price quickly fell below $1.
In the two decades that followed, Sirius XM struggled to stay relevant. The dawn of social media and streaming TV brought new entertainment options — and the novelty of genre-themed music and talk shows faded.
What didn’t fade, however, is investors’ love affair with Sirius XM stock. After flirting with the Nasdaq’s sub-$1 delisting rule a second time in 2008, die-hard traders continued to dump money into the name. Two years ago, the stock hit $8 for the first time since 2004. Has the company somehow found its way in the ultra-competitive media industry?
Not exactly. Much has changed since accessing Howard Stern from anywhere was a thing. Sirius acquired Pandora. Liberty Media now owns more than 80% of the combined company. Despite the beefed up stature, Sirius XM’s financials have weakened alongside demand for its subscriptions. Earlier this month, management gave a soft 2023 outlook that reflected an anticipated slowdown in consumer spending and car buying.
Back in penny stock territory, Sirius XM’s $18.4 billion valuation still seems like a stretch. Approximately 30% of S&P 500 companies have lower market caps. Darden Restaurants, First Solar, Royal Caribbean and many more are valued less despite having far better growth prospects. Sirius XM doesn’t qualify for index membership for a good reason.
Perhaps due to hopes of a big buyout offer, Sirius XM stock won’t go away. But with the business model past its prime and the upside limited, investors and traders should tune this one out.
Does Grab Holdings Have Good Growth Potential?
Grab Holdings Limited (NASDAQ: GRAB) is a souped-up version of Uber with a poorly-timed IPO near the stock market’s January 2022 record peak. Despite its $3 share price, Grab commands a $12.8 billion market cap that is less than one-fifth that of Uber. Shareholders are essentially betting that the company can grow into an Uber-like valuation.
The growth potential is undeniably huge. Dubbed the ‘super-app of Southeast Asia,’ Grab offers an expanding menu of services across eight countries, including ride-hailing, food delivery and financial services. An estimated one in 20 people in Southeast Asia use the Grab app monthly. In the most recently reported quarter, revenue soared 143%.
Despite the lofty numbers, Grab’s share price reflects the market’s recent lack of appetite for unprofitable companies. Until management can progress towards profits, the top-line growth will matter little. It will get the next opportunity to do so during next week’s earnings report.
Given the exposure to some of the fastest-growing economies in the world, this won’t be a penny stock for long. Barring Grab’s 2023 outlook, grabbing shares under $4 could be a steal.
Did Nu Holdings Report Good Q4 Earnings?
Nu Holdings Ltd. (NYSE: NU) is in the same boat as Grab Holdings. It's December 2021 IPO couldn’t have come at a worse time. Even though the Latin American digital bank has fallen into penny stock land, the fundamentals are on the upswing.
With more than 70 million customers across Brazil, Mexico and Colombia, Nu is quickly amassing a base that can be the foundation for long-term growth. Nearly 40% of Brazil’s adult population are Nu Bank customers.
The mobile app is fast becoming a popular way to manage savings, send money, and access loans and credit cards — especially among younger consumers. More than half of Nu’s customer base is under 35 years old.
The company just reported Q4 earnings which can be accessed here. Trends in revenue growth and profitability look healthy and the exposure to tens of millions of future wage earners is an attractive investment quality. The $22 billion valuation is high but so too is the long-range growth forecast. Keep this one on the watch list for a better entry point alongside Grab.