Back in May, I decided that the [email protected] Capital (LSE:SYME) share price was significantly overvalued. And based on the price today, it seems that was an astute conclusion. The stock has since declined by around 32%, bringing its 12-month performance to a disappointing -60%.
Seeing such volatility in a penny stock is hardly surprising. But is this collapse in market capitalisation an opportunity to buy the shares at a discount? Let’s take a look.
The volatile SYME share price
As a reminder, [email protected] is a fintech company specialising in inventory monetisation. This is a fairly complex business. But put simply, it enables companies to cover the costs of their suppliers before actually selling any products. Traditionally, this is done using loans where the products are held as collateral. But under [email protected]’s platform, a customer could achieve the same result without taking on debt.
That certainly sounds promising. And it seems its customers agree as the management team expects total revenue for the year to come in at £3.9m to £4.9m. By comparison, revenue in 2020 was £416,000, indicating a potential 10x increase. Needless to say, that’s a positive sign. So why did the SYME share price continue falling on this guidance?
The risks continue to mount
Despite the enormous revenue growth, profits still elude this business, meaning it remains dependent on external funding. And with such a lofty valuation attached to this penny stock, it seems investors were simply expecting more growth. As a consequence, the SYME share price has tumbled.
[email protected] recently secured a new £5m loan with an additional £2m available as of early December. This loan undoubtedly provides some breathing room, as well as bolsters the balance sheet. That may be why the SYME share price jumped slightly on the news.
However, I remain cautious about the announcement, as this loan comes with a 10% interest rate. And with no profits to cover this expense, any slowdown in growth could have some significant adverse impacts on the financial health of this business. Therefore, I would not be surprised if [email protected] has to turn to shareholders to raise additional capital in the future through an equity issue. Equity dilution in young businesses is not uncommon. But it will harm the SYME share price if management cannot use the raised capital effectively.
The bottom line
It’s pretty difficult to judge [email protected] in its current state. The business ultimately remains unproven. But the rising level of revenue clearly shows it has a platform that customers are interested in. What’s more, it recently acquired an investment advisory recurring revenue stream through the acquisition of TradeFlow.
I continue to be intrigued by this company. However, it’s become clear that it remains dependent on third-party funding. And if that capital were to disappear, the penny stock could potentially go to zero. Therefore, all things considered, I’m keeping it on my watchlist for now.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.