3 Penny Stocks to Watch in the Tech Sector

By Fool.com

A modern penny stock trades at less than $5 per share. Some of these low-priced shares may be primed for huge returns, while others are cheap for all the right reasons. Here are three penny stocks to watch in the tech sector. These examples range from the exciting to the downright scary.

ZIXI Revenue (TTM), data by YCharts

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Zix mainly provides secure email services to corporate and government clients. Through a mix of easy-to-use encryption and never actually downloading sensitive data to your desktop or smartphone, the company hopes to become a leader in the secure messaging space.

The stock trades at $4.85 per share today, just below the penny-stock threshold. It's also a very small company, sporting a $277 million market cap and just $52 million in sales over the last 12 months.

In this day and age, solutions for super-safe communications practically sell themselves. Zix works with a fantastic list of technology partners. The roster of known clients is less impressive so far, but that leaves plenty of headroom for future growth.

Zix shares have doubled over the past five years, as total sales increased by 84% in a slow, steady surge. The company's free cash flow is lumpy and unpredictable, but undeniably also on an upward trajectory over the long term:

Zix Revenue vs. Free Cash Flow, data by YCharts

Zix is profitable, can show steady growth, and offers a product with strong selling points in an important market. Moreover, Zix's balance sheet is squeaky clean with $28 million in cash reserves and no debt to speak of.

This is a great example of a potentially interesting stock that probably shouldn't be trading at a rock-bottom valuation. Zix is a penny stock to watch, because you might want to own it one fine day.

GlobalStar Revenue vs. Free Cash Flow, data by YCharts

GlobalStar is a very different story.

The seller of satellite-based communications services increased its sales by just 33% over the past five years, burning a lot of cash along the way. For one brief moment in 2010, the company could look back at $19 million of positive free cash flow across the previous four quarters. Otherwise, GlobalStar has always consumed more cash than it could generate.

The stock trades for less than $1.80 per share. The bloated balance sheet shows less than $13 million of cash equivalents but $629 million in total debt.

GlobalStar's best business idea -- a low-powered satellite network designed to provide broadband Internet access in rural and underserved areas -- is under fire from the FCC, independent signal testing experts, and a broad coalition of tech giants. The so-called TLPS network could interfere with standard Wi-Fi signals everywhere. Similar concerns have pushed entire companies out of business before.

Short-selling market research firms use GlobalStar as a shining example of awesome negative bets. And why not? The company has fixed its sights on a questionable and very expensive business idea, burning cash by the bucketload along the way. Meanwhile, even this minuscule share price looks high by most metrics.

Granted, GlobalStar's price-to-earnings ratio looks temptingly low at just 7 times trailing earnings. However, the bulk of those positive earnings were created by non-cash adjustments to the value of GlobalStar's various debt instruments.

In short, you want to watch this penny stock from afar. GlobalStar is not the kind of stock you want to take home.

Glu Mobile Revenue vs. Free Cash Flow, data by YCharts

Let's end this penny-stock expedition on a high note. Glu Mobile has danced on the edge of bankruptcy in the past but came back swinging.

The maker of games for mobile phones was on the ropes in 2008. The first true smartphones had only just hit the market, and then the global economy took a nosedive. Glu raised some debt just to stay alive, and the stock dipped as low as $0.22 per share for a while.

But then the company started to enjoy a new era in mobile gaming. Glu quickly established itself as an expert in smartphone and tablet gaming, riding a diverse portfolio of titles.

Besides producing mobile games under a license tied into popular action movies and established console games, Glu also comes up with some original ideas. Right now, Kim Kardashian: Hollywood is Glu's biggest seller, representing 31% of the company's second-quarter revenue. This company is nothing if not opportunistic.

Thanks to hits like Kardashian, Glu's balance sheet is debt-free while its cash reserves more than tripled over the past four quarters.

Now, it's certainly true that Glu might not be able to copy the runaway success of its Kardashian home run. But that megahit improved Glu's ability to develop and market the next wave of potential cash cows. The company has boosted its R&D budget by 20% in the past year alone, paving the way toward a more stable future.

This isn't exactly a must-have penny stock today, but Glu absolutely deserves a closer look as long as mobile gaming remains popular. That might just be forever, in which case we're watching a future titan of that industry as it grows up.

The article 3 Penny Stocks to Watch in the Tech Sector originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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