1 ‘nearly’ penny stock I’d buy and hold for the next decade

This under-the-radar penny stock is disrupting the UK’s digital payments space. Is it one of the best shares to buy for the next decade?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young brown woman delighted with what she sees on her screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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, ITV, and Vodafone Group Public. 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.

More on Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »