1 cheap ex-penny stock set for huge potential growth and dividends!

The UK mobile payments space is forecast to reach $867.25bn by 2027, and this rapidly rising ex-penny stock is perfectly positioned to rise this tailwind.

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The world of penny stocks is fraught with volatility and danger. That’s because these often tiny enterprises lack the resources, talent, or experience to succeed on their ambitious journeys. And yet, every once in a while, a diamond in the rough emerges.

Fonix Mobile (LSE:FNX) is a rather unique mobile payments enterprise that’s recently left the penny stock territory. And despite a recent pullback in share price, the underlying business seems to be thriving. Let’s take a closer look at what could be a rare combination of high-quality growth and income for long-term investors.

Tapping into the tailwinds of digital payments

Mobile payment technology is a relatively new innovation. But there are already plenty of heavy-hitting industry titans dominating the space. So how has Fonix Mobile, a £200m market-cap company, managed to stand out and capture its own slice of market share?

Instead of charging a transaction directly to a debit or credit card, someone using Fonix’s mobile payment network will see the charge added to their mobile phone bill.

This effectively turns any mobile device into a cash register that provides a lot of conveniences. So much so that there are already 18 million people using it. And this adoption continues to rise.

Total revenue for the last six months came in 14.7% higher than a year ago at £32.8m. This came paired with a 12.3% increase in net income. And since management’s dividend policy is to pay out 75% of adjusted EPS to shareholders, dividends just got bumped even higher, pushing the yield to 3.4%.

Needless to say, this level of revenue and profit growth coming from a (albeit former) penny stock isn’t exactly typical. Furthermore, with new businesses accepting Fonix’s payment solution, and old customers — like ITV — extending their contracts, the firm looks primed to continue thriving. And with the UK mobile payments market size forecast to grow at a 30.1% compounded rate reaching $867.25bn by 2027, there remains immense long-term growth potential.

Even ex-penny stocks aren’t risk-free

While accelerating growth and generous dividend policies are undoubtedly attractive, that doesn’t mean they’re guaranteed to continue in the future.

Fonix Mobile is a cash-generating machine. But only when transactions are flowing through its payment network. And with the latest UK inflation data revealing further increases in food and energy prices, discretionary consumer spending is facing increasingly strong headwinds.

But a potentially more severe threat is the stock’s overdependence on a few key customers. While management is slowly expanding its pool of merchants, earnings remain highly dependent on just 10 of them. And should any decide to jump ship, it could severely harm the firm’s cash flow.

Obviously, that’s quite a big weakness to carefully consider. And it could take a long time for this small enterprise to diversify its merchant pool sufficiently to eliminate this threat.

However, the company is delivering accelerating double-digit revenue, profit, and dividend growth while trading at a relatively cheap P/E ratio of just 23. Therefore, I feel it’s a risk worth taking with a small position within my growth portfolio. And it’s why I’m tempted to snatch up some shares once I have more capital at hand.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Fonix Mobile Plc and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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