ASX penny stocks are often more volatile than well-established, blue-chip companies.
The truth is, some of these companies will never reach a profit, and stay afloat by capital raising and issuing new stocks.
While many ASX penny stocks never generate profits, a small number manage to grow through successful projects or market breakthroughs, eventually evolving into profitable small-cap or even mid-cap companies.
One that has drawn the attention of brokers at Bell Potter is Spirit Technology Solutions Ltd (ASX: ST1).
The company provides telecommunication services, cloud services, managed IT services, and cybersecurity services to small and medium-sized businesses.
Bell Potter has just initiated coverage with a buy rating on this ASX penny stock.
Lets see what's behind the optimism.
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Expected to grow
Spirit has three operating segments – Cyber Security, Secure Managed Technology and Cloud & Communications.
According to a new report from Bell Potter, all three reported positive underlying EBITDA in FY25 following the successful turnaround of Secure Managed Technology.
The company also said it expects significant organic growth in FY26.
The broker also said Spirit is now the largest listed cyber security provider on the ASX.
The company therefore provides key exposure to the cyber security market in Australia which is already large at c.A$9.2bn in total revenue in 2024 and is forecast to grow by a CAGR of 13.3% between 2025 and 2034 to reach around A$32bn by 2034.
The strong forecast growth is being driven by increasing cyber threats, digital transformation and government initiatives.
The broker also said there is potential for an acquisition.
There has been a number of acquisitions recently in the cyber security market and Spirit could be a target with its leading market position.
Valuation and upside from Bell Potter
Based on this guidance, Bell Potter has placed a price target of $0.60 on this ASX penny stock.
This indicates an upside of 30.43% based on yesterday's closing price of $0.46.
It is important for investors to also be aware that penny stocks like ST1 come with heightened volatility and risk.
Bell Potter identifies key risks for the company including funding risks from potential breaches of debt covenants requiring refinancing or capital raising, and cyber, technology, and partner risks that could materially impact operations, reputation, and financial performance.
