Investing in a penny stock may sound like a crazy idea when trying to tap into the electric vehicle (EV) boom. After all, being a car manufacturer is hard, and building lithium-ion batteries is far too expensive for a tiny business to undertake.
But there are more ways to invest in this this space. And it seems many investors are overlooking this £124m business, resulting in a dirt-cheap share price. Let’s take a closer look.
One of the best penny stocks to buy now?
Solid State (LSE:SOLI) is a designer and manufacturer of electronic components for various industries. Historically, management has focused on targeting small business customers that don’t have the expertise to develop their electronics solutions in-house. The strategy has proven to be quite successful so far. But with a niche target audience, growth has been limited.
As such, the group has begun reaching out. Following two recent acquisitions of Active Silicon and Willow Technologies, the firm now has a much larger capacity to handle enterprise-scale clients like BAE Systems. However, it’s the acquisition of Willow that caught my attention.
Much like Solid State, Willow is a designer of electronic products. But among its long list of components includes the globally recognised Durakool relays and contactors. These devices enable remote control switching capabilities, and EVs usually have around 20 of them throughout the drive system, battery, lighting, and steering.
Demand for Durakool components is rising in parallel with the EV industry, creating a potentially explosive growth opportunity for this penny stock. Pairing this with profits already materialising, double-digit revenue growth, and a ballooning order book makes it an excellent addition to my growth portfolio, in my opinion.
Nothing is risk-free
Penny stocks have a well-earned reputation for being risky. And while Solid State seems to be significantly more established than other companies in this space, it still has its fair share of challenges.
Forecasts for 2023 earnings look weak in comparison to historical achievements. And it’s not hard to see why. With supply chain disruptions, especially regarding semiconductors, sourcing the raw materials needed to build its electronic components has been challenging.
As a long-term investor, this is ultimately a short-term problem. However, it’s having a tangible impact on profitability. With raw material costs on the rise, profit margins are getting squeezed. The firm’s small size doesn’t seem to yet provide Solid State with immense pricing power, especially with its vast level of competition.
Nevertheless, given the growth opportunity, I feel this risk is worth taking and would buy it for my portfolio today. EVs are a rapidly expanding industry, but so is 5G, IoT, healthcare, energy, defence, and logistics – all of which this penny stock already has a hand in.
