High growth might make this company the ultimate penny stock

While some penny stocks are undoubtedly iffy investments, our writer thinks this one might be a bit of a hidden gem with huge share price growth potential.

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Sosandar (LSE: SOS) is an under-the-radar penny stock. The women’s fashion e-tailer’s shares change hands at just under 30p per share and the market capitalisation is only around £60m. Yet revenue has gone from £1.35m in 2018 to £12.2m in 2021. Could this phenomenal growth continue and make Sosandar a great share to buy right now?

The case for investing in this penny stock

When looking at a small-cap penny stock one of the things many private investors want to see is management holdings, as well as (of course) the business’s financial performance. On this front, I think Sosandar measures up well. Alison Hall, the co-founder and current joint CEO, has around 5% of the shares. On that basis management incentives are well aligned with shareholders. She’ll presumably want the share price to go up!

Talking of investors, the company has a number of very reputable institutional investors among its biggest holders, including Octopus, Amati and Schroders. Another reassuring sign I think. 

Sosandar said last month that revenue had soared in the three months ended 31 December, leading the group to a record quarterly performance. Revenues were up 122% year-on-year in the third quarter at £8.85m. This will move it towards profitability, which I think will make it seem like a much better investment.

Analysts at Singers see potential for Sosandar to achieve £75m-£100m revenues and a more than 10% EBITDA margin, within the next couple of years, indicating the potential for massively improved financial performance in the coming years.

The retailer could also expand overseas. Management has spoken of a “massive opportunity” to expand overseas via third-parties. Again, this could really boost organic growth and help lift the company into profitability.

Overall, to answer my earlier question, I think the phenomenal revenue growth could continue and increasing economies of scale and repeat custom could make this a much higher-quality, profitable business. In turn, I’d hope to see that translate into strong share price growth.

The bear case

There are still issues though. The company right now is loss-making. That will put off some investors. Fashion is also notoriously risky as new products are launched every season and could fail to spark. The biggest risk is the shares aren’t cheap, especially because it’s an unprofitable business. Furthermore, if something goes wrong, and revenue growth stops, the share price would very likely plummet.

Weighing the scales

The rapid growth of e-commerce in recent years hasn’t helped it move into profit just yet. But the business is moving in the right direction and is relatively young, while the top line is growing fast. 

As a penny stock with a £60m market cap, there’s a lot of room for Sosandar to become much bigger than it currently is. It operates in a massive market with lots of potential customers, so while there is competition, there is also a huge opportunity. If I weigh up the risks versus the rewards Sosandar looks to be heavily weighted towards future share price growth as and when it becomes profitable. For that reason, I’m considering adding the shares to my portfolio. I think Sosandar might be a bit of a hidden gem.  

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.

Andy Ross owns no share mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). 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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