Investing in penny stocks is a volatile experience, especially when tapping into rising industries and trends. The adoption of electronic vehicles has certainly built up a lot of hype. It’s easy to understand why, given the governmental push to adopt such technologies and the increasingly prominent impact of climate change.
However, while most of the attention is being put on electric vehicle manufacturers, investors are seemingly overlooking key suppliers like Solid State (LSE:SOLI). At a market cap of £137m, the electronics component manufacturer has recently surpassed the £100m penny stock upper threshold. Yet it remains firmly within small-cap territory, at least for now.
A future leader in EV components?
After a series of bolt-on acquisitions, Solid State’s product portfolio has expanded. And it now contains globally recognised branded components such as Durakool relays, contactors, and sensors. These are fairly specialised. But they’re a critical piece of the drive, lighting, battery, and steering system in modern-day EVs.
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So, it’s no surprise that demand for these components has been rapidly rising over the years – a trend that’s expected to continue. Obviously, that’s a powerful medium-term tailwind. And it could also help the business diversify itself away from solely relying on cyclical defence contracts with BAE Systems and others to drive growth.
In the meantime, business is booming. Demand for Solid State’s communication equipment solutions from the defence sector has been rising as, tragically, more conflicts have broken out.
So, despite inventory destocking headwinds plaguing most of the electronics sector, the group’s sales and earnings are growing at a record pace. Looking at its latest results, sales between March 2023 and 2024 surged by 29%, reaching £163.3m, with pre-profits landing 44% higher at £15.6m.
What could go wrong?
As with every promising investment, there are always risks to consider. This is especially true when it comes to near penny-stock small-caps.
Beyond the threat of general share price volatility, Solid State has quite a few challenges to overcome. Management has been busy investing in expanding the group’s manufacturing capacity to keep up with demand. However, should demand start to drop off, this investment may end up backfiring, putting pressure on margins.
At the same time, Solid State isn’t the only supplier of electronic components and systems to the EV or defence sectors. There are far larger competitors it has to fend off, many of which have far deeper pockets. Now that the firm is starting to make waves, defending and expanding its market share is likely to become far more difficult moving forward.
Nevertheless, this business is developing a habit of defying expectations. And at a price-to-earnings ratio of just 15, the stock is looking relatively cheap considering the growth potential that lies ahead. That’s why I’m considering snapping up some shares for my own portfolio once I have more capital to hand.
