Calnex Solutions (LSE: CLX) is a penny stock that hasn’t performed well for me recently. Last month, it fell more than 50%.
Now, sometimes it can be sensible to bail out of underperforming stocks. However, in this case, I’ve done the opposite and bought more.
Profit warning
Calnex is a Scottish technology company that specialises in testing and measurement services for telecoms networks.
Its solutions are designed to help its customers (which include the likes of BT Group, Vodafone, and AT&T) validate the performance of the critical infrastructure associated with digital communication networks.
Until recently, Calnex had a really good track record when it came to growth. Between FY2018 and FY2023, for example, its revenue climbed from £8.4m to £27.4m.
It also had a good track record in terms of profitability. Over that aforementioned five-year period, return on capital employed (ROCE) averaged 27.4%.
However, in recent months, the company has been hit by a downturn in spending across the telecoms industry, with several customers delaying orders due to the weak economic backdrop.
As a result, it advised in October that revenues for the current financial year would be 20-30% below market expectations (a big miss).
Naturally, this profit warning sent the AIM-listed penny stock down sharply.
At one stage, it was trading near 40p – about 80% below its 2023 highs.
Taking a long-term view
After the recent profit warning, near-term broker forecasts don’t look great.
For the current financial year (ending 31 March 2024), revenue is expected to come in at £16.9m, down 38% year on year. Meanwhile, brokers expect zero earnings per share.
So, the short-term outlook is a bit of a write-off.
However, I’m a long-term investor, and taking a long-term view, I remain optimistic in relation to the company’s growth prospects.
The way I see it, demand for telecoms network testing services should be quite high over the next decade due to the rollout of 5G network technology.
This technology is complex in nature and requires comprehensive testing to ensure optimal performance.
It’s worth noting that according to Future Market Insights, the global communication test and measurement market is projected to grow by around 8% per year between now and 2033.
And Calnex has said that it’s confident of returning to growth in FY2025 and beyond.
Another reason I’m optimistic is that Calnex is led by founder Tommy Cook.
And he owns about 17.4m shares in the company (around 20% of the business).
So, it’s fair to say that it’s in his interests to turn things around and get the share price higher.
Other major investors include JP Morgan, Liontrust, and Sanford DeLand Asset Management, so there are some big-name investors onboard here (unlike a lot of other penny stocks).
Ultimately, I think this is a good company – with attractive long-term growth prospects – that is going through a challenging period right now.
That’s why I’ve bought more shares.
I’m backing it for success
This move could backfire on me, of course.
If we see further profit warnings, the shares may go lower.
One risk that concerns me a little is that customer concentration is high. Currently, Calnex’s top 10 customers account for around 50% of revenues. This isn’t ideal.
However, given the long-term industry outlook, I am prepared to take the risk with this stock.
I’m backing it to rebound in the years ahead.
