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About to Buy Penny Stocks? Look at These 3 Companies First

Jeremy Bowman, Todd Campbell, and Sean Williams, The Motley Fool

Penny stocks have a way of luring in investors, especially those just learning about the stock market. With low prices, generally under $5, penny stocks present themselves as having immediate upside potential. After all, it's usually easier to imagine a stock can double from $5 to $10, than to think it will go from $1000 to $2000.

However, penny stocks come with plenty of risk: They often belong to companies that have been beaten down significantly, or are fly-by-night microcaps that are often manipulated by traders. Investors are usually better off avoiding stocks selling for just pocket change, but that doesn't mean they have to sacrifice growth to get safer stocks.

Here's why Twilio (NYSE: TWLO), Intuitive Surgical (NASDAQ: ISRG), and MercadoLibre (NASDAQ: MELI) can all deliver blockbuster growth, even though they have triple-digit share prices today.

A jar of pennies next to a blurry pile of pennies

Image source: Getty Images.

A communication-enabling pioneer for the 21st century

Todd Campbell (Twilio): In the past, communication between companies and their customers involved inefficient phone calls, in-person visits, or email. In the present, it's increasingly shifting online through in-app tools that allow instant two-way interaction. At the forefront of this technology is Twilio, a developer of app technology that allows companies like Lyft, StubHub, and Airbnb to update customers on rides, tickets, or rooms, respectively.

Twilio's ability to help companies easily incorporate features like voice, text, chat, and video into their apps is winning over decision-makers, and driving breakneck revenue growth. It has 154,797 active clients, up from 53,985 one year ago, and revenue from those clients increased 81% year over year to $233.1 million in the first quarter. Importantly, Twilio's becoming even more deeply embedded within its existing accounts. Last quarter, its net expansion rate -- current revenue per client compared to one year ago -- was 146%.

After reporting better-than-expected first quarter results, management now expects sales will reach $1.1 billion in 2019, up from $650 million in 2018. Previously, it was aiming for $1.06 billion in revenue.

That's not the only encouraging news, though. Management says it will report over $5 million in non-GAAP operating profit this year, up from its prior outlook for over $4 million in operating profit. With rapid growth and improving profitability, Twilio could be a much better choice than penny stocks.

This $500 stock will run circles around any penny stock

Sean Williams (Intuitive Surgical): Although penny stocks can appear alluring, there's often a very good reason a company is valued at less than $200 million, or trading for potentially pennies on the dollar. Rather than mining for gold in a minefield, I'd suggest taking the opposite approach and digging into a company with one of the highest share prices you'll find: Intuitive Surgical.

Intuitive Surgical is the manufacturer of the da Vinci surgical system, which assists surgeons in various soft-tissue surgeries that had previously been done laparoscopically. These surgical systems provide precision that helps speed patient healing times -- and they've been putting a lot of money into the pockets of Intuitive Surgical for more than a decade.

Though the da Vinci system is pricey, often costing between $500,000 and $2.5 million (depending on the model), these machines are actually not the biggest moneymakers for the company; they're intricate and costly to build. Rather, Intuitive Surgical makes the bulk of its profit from supplying tools and instruments for each procedure, as well as servicing the da Vinci system. What's great about this razor-and-blades setup is that as Intuitive Surgical's installed base of surgical system grows, its margins should improve, since it'll be more reliant on higher-margin instrument and service revenue as time goes by.

This is a great time to mention that while Intuitive Surgical holds significant market share in urology and gynecology procedures, it's just scraping the tip of the iceberg in thoracic, colorectal, and general soft-tissue surgeries. Thus, while it has some form of moat in assistive surgical procedures, the runway is considerably longer than you might realize.

And, oh yes, Intuitive Surgical has quite the competitive advantage. Having installed its da Vinci systems for nearly two decades, the company now (as of March 31) has 5,114 installed systems worldwide. You could pretty much add up all of the company's competitors, and they still wouldn't hold a candle to Intuitive Surgical's installed base. Not to mention: Investing perhaps $1 million to $2 million into the machine, and training surgeons, means that hospitals are likely to be tied to the system (and the company) over the long run. Therefore, Intuitive has little worry about losing its clients to competitors.

Sure, Intuitive's $508-per-share price might seem intimidating, but this company is a much better value than pretty much any penny stock.

Don't let the price tag scare you

Jeremy Bowman (MercadoLibre): It's only May, but MercadoLibre's shares have already nearly doubled this year after two blowout earnings reports. The Latin American e-commerce leader may be trading at more than $500 per share now, but that certainly hasn't stopped the stock from flying higher, nor has it stood in the way of the company's growth.

Just take a look at MercadoLibre's latest quarterly numbers. On a currency-neutral basis, revenue jumped 93% to $473.8 million, and on the bottom line it flipped a $12.9 million loss a year ago to an $11.9 million profit. MercadoLibre's revenue surge is being driven by a transition into a payments platform: It's become a payment-services provider outside its own e-commerce marketplace, benefiting from a recent investment by PayPal. In the first quarter, total payment volume jumped 83% to $5.6 billion in currency-neutral terms, and off-platform total payment volume surged 194% on a currency-neutral basis.

What's also encouraging about MercadoLibre's growth in recent years is that it's happened while much of Latin America has been in crisis. Venezuela is on the brink of civil war. Argentina just devalued its currency, and Brazil has been mired in a recession and high inflation for much of the last decade. Nonetheless, MercadoLibre has consistently put up impressive growth, and emerged as the clear leader in the fast-growing e-commerce industry.

In Mexico, for example, which has avoided some of the problems plaguing other parts of the region, MercadoLibre saw revenue jump 220% in the first quarter, compared to 51% in the quarter the year before. If the region ever realizes its potential, there will be little stopping the MercadoLibre juggernaut. In the meantime, the combination of leading e-commerce marketplace and payments platform should continue to pack a punch.

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Jeremy Bowman has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. Todd Campbell owns shares of Intuitive Surgical, PYPL, and Twilio. The Motley Fool owns shares of and recommends Intuitive Surgical, MercadoLibre, PYPL, and Twilio. The Motley Fool has a disclosure policy.