Investing in penny stocks is the pinnacle of risk. After all, most of these businesses are tiny for a good reason. And all too often, investor excitement can pump up their valuations, only to come crashing down after absurd expectations aren’t met.
But every once in a while, a diamond in the rough can emerge. And one company that’s caught my attention this month is Fonix Mobile (LSE:FNX).
A new mobile payments solution
As the war on cash rages on, new digital payment methods are emerging across the country. And mobile payments are quickly gaining steam – a tailwind that Fonix Mobile is currently capitalising on.
The penny stock offers a unique mobile payment solution for small transactions of up to £40. Whenever an individual uses its payment system, the money isn’t taken directly from a bank account but instead added to their next mobile phone bill. It’s effectively like a mini credit card without the massive interest fees on a few days’ late payment.
Fonix’s solution has proven to be immensely popular. After partnering with almost all major telecommunication companies, such as Vodafone, 3, EE, Sky, and O2, the firm now has 123 mainstream merchants supporting its payment method. Some of its clients include the BBC, BT Sports, ITV, and English Heritage.
With a diverse range of applications, the company has attracted over 18 million users – or 27% of the British population. Subsequently, revenue and operating income have grown annually by an average of 25% and 35% over the last five years.
Penny stocks are risky
As impressive as the group’s accomplishments have been to date, the risk profile is undeniably high. Fonix generates revenue by charging small fees on each transaction. Therefore, an economic recession doesn’t exactly create the ideal operating environment.
But this is ultimately a short-term problem. My main concern is the state of its client list. Those 123 merchants doesn’t equate to a particularly long list, even if it is slowly expanding. Yet just 10 of these clients facilitate 85% of Fonix’s revenue stream.
Suppose just one of these businesses decides to cut ties? In that case, it could severely compromise the company’s cash flows and send the penny stock firmly in the wrong direction.
However, seeing that this business hasn’t lost a single client in the last seven years is encouraging. But this dependency doesn’t exactly provide the best leverage when it comes to renewing merchant contracts.
The bottom line
Fonix’s innovative payment method isn’t easily replicated and does provide a notable competitive moat against any potential disruptive start-ups. And the immense popularity of its platform among consumers will undoubtedly attract more merchants in the future. At least, that’s what I think.
The risk associated with this penny stock is high. But that’s to be expected when venturing into this region of the stock market. And providing Fonix can continue to make good on its long-term strategy, the next decade could be a stellar period of growth for this enterprise.
That’s why I’m tempted to open a small position within my personal portfolio once I have more capital at hand.
