Penny stocks often have unproven business models and add considerable risk to an investor’s portfolio. But, some have huge growth potential too. AIM-listed company Ilika (LSE:IKA) has all of these characteristics, in my view.
The firm was founded in 2004 as the brainchild of the School of Chemistry at Southampton University. It develops solid state batteries for a variety of industries, from electric vehicles to healthcare.
Lithium-ion batteries have attracted significant attention in recent years, but Ilika’s rival technology could potentially offer solutions to many of their problems. I think this penny stock might make a nice addition to my portfolio. Here’s why.
Solid state battery technology isn’t new, but widespread application has proved challenging. Ilika’s trying to address this through its choice of materials and manufacturing process.
Technological advancements have allowed the company to lower production costs. In addition, its batteries can be charged more times and withstand higher temperatures than previous solid state designs.
Solid state batteries have potential advantages over liquid lithium-ion batteries. Taking electric vehicles as an example, according to Ilika, its batteries offer “a higher cell to pack ratio, lighter vehicles, higher energy and power density, extended range and fast charging“.
That all sounds promising, but the company isn’t profitable yet. Ilika’s EBITDA loss widened to £4.1m in H1 2023 from £2.7m in H1 2022. There’s still a long way to go before the firm becomes a fully-fledged commercial success.
Ilika has two major product lines. The first is its Stereax miniature battery range. They’re particularly useful for medical devices, minimally invasive implants, and industrial applications.
Promisingly, the company recently signed a 10-year agreement with US-based medical device provider Cirtec Medical focussing on technology transfers and the supply of Stereax products.
Demonstrating the partnership’s potential, the Ilika share price surged 10% on the news and it’s climbed 82% in 2023 so far. However, the stock’s still down 83% from its 2021 peak. Potential investors should note the volatility risk they would be taking on if they bought shares.
The second product line is the company’s large-format Goliath batteries. Designed for electric vehicles, Ilika’s focused on enhancing their capabilities in enabling longer ranges for transportation and easy recyclability.
But, they aren’t cheap. Accordingly, the firm aims to target the luxury automotive sector where cost sensitivity is less of a concern and manufacturers might be prepared to pay a premium for the batteries’ unique qualities. Time will tell how successful this strategy is.
Although there’s a compelling case to be made for Ilika’s differentiated technologies, the business is still largely unproven. It only generated £200k in revenue during H1 2023, which suggests the technology still needs to mature before the company can reap the potential rewards.
Additionally, the cash balance slumped to £18.6m from £27.7m in H1 2022. Funding could potentially become an issue if Ilika fails to demonstrate a clear route to commercialisation.
Why I’d buy this stock
This penny stock is a speculative investment proposition, but there’s considerable potential in the company’s technology.
I wouldn’t want to invest too much as the risk/reward profile is high, but if I had spare cash, I’d be happy to allocate some to Ilika shares.