Will this penny stock be the next Nvidia?!

Nvidia shares have exploded 29 times in value since 2019, but can this semiconductor penny stock do the same? Zaven Boyrazian investigates.

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Investing in the right penny stocks can deliver explosive returns similar to that of Nvidia. As a reminder, the semiconductor giant has so far been the biggest winner of the artificial intelligent (AI) technology race, with shares exploding by over 2,900% in the last five years.

Finding a business capable of replicating such gains in a similar time frame isn’t easy. However, there are a lot of promising micro-cap enterprises with similar levels of explosive potential. In particular, EnSilica (LSE:ENSI) seems to be making impressive strides that could propel it far beyond its current market value.

Robotics, Industrials and AI

Much like Nvidia, EnSilica is a chipmaker specialising in Application Specific Integrated Circuits (ASICs). These are custom-tailored chips designed to fulfil a specific purpose. And they’re proving to be essential within cutting-edge technologies across multiple sectors. This includes robotics, 5G networks, self-driving car radar systems, and even wearable healthcare monitoring systems, all of which EnSilica already has a foothold in.

What’s more, the surge in demand’s already translating into tangible results. Looking at its latest trading update, the firm’s expecting to deliver record-high sales of £25m for its fiscal year, which ended in May. And, impressively, unlike many of its peers, the business is actually profitable!

The group’s suffered some significant impact from the recent economic turbulence that’s led to some project delays. But these hold-ups are expected to unwind throughout the rest of 2024, placing EnSilica in a strong position to deliver even better results in its 2025 fiscal year.

That’s an opinion management seems to share with guidance calling for revenue to reach £30m and EBITDA to land at £5m.

Both represent chunky levels of double-digit growth. And when compared to the estimated $500m (£394m) opportunity pipeline, EnSilica seems to have only scratched the surface of its long-term potential.

Risk and reward

Assuming the business successfully hits its targets and capitalises on all of its opportunities, investors will undoubtedly enjoy a massive boost to their wealth. However, it’s important to keep expectations in check since, as with all small enterprises, a spanner is likely to be thrown into the works at some point along the line. And even if the best-case scenario does emerge, there’s still the question of cyclicality.

Much like Nvidia, EnSilica’s a cyclical business with periods of stellar growth followed by stagnant demand. The balance sheet doesn’t appear to have any major flaws, but it’s still relatively cash-light, with only £1.3m at hand at the end of April 2024.

Subsequently, like many penny stocks, the firm recently executed a round of equity fundraising. This action ended up raising £5.2m, giving management more financial flexibility moving forward. But it’s also triggered a notable chunky of equity dilution – something that could easily occur again, should more money be needed.

The bottom line

Compared to the average penny stock, EnSilica looks quite impressive. The business is profitable, growing at a rapid pace, and has tremendous long-term potential. But it’s also critical to highlight that its future success is far from guaranteed. And with a lot of its current valuation seemingly being driven by investor expectations, it’s going to be a volatile ride.

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 Nvidia. 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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