Penny share Calnex Solutions (LSE: CLX) is one of the worst performers in my portfolio. Currently, I’m down about 50% (at 59p the stock is about 70% below its highs).
Now, often with losers like this, I simply accept that I got it wrong and cut my losses (it can be depressing to stare at losing positions in a portfolio). However, in this case, I’m holding on because I’m not ruling out an explosive comeback.
Why has this stock tanked?
Calnex is a technology company that specialises in testing and measurement solutions for the telecoms industry. Using its solutions, customers (such as BT and China Mobile) are able to validate the performance of critical network infrastructure (which is essential when rolling out and upgrading networks).
Now, this company previously had a great track record in terms of growth and profitability. When I invested back in 2021, its financials were absolutely brilliant.
However, in recent years, telecoms operators haven’t been spending a lot of capital on testing services. And this has led to a major slowdown in sales growth – and a huge drop in profitability – for the company.
For example, in FY24, revenue fell to £16.3m from £27.4m the year before. This drop in revenue led to its net profit falling from around £6m to near zero.
This fall in revenue and profits is why the stock has tanked.
Why growth could pick up
The good news is that conditions in the telecoms market have stabilised. As a result, the company’s revenues and profits are rising again.
For FY25, revenue was £18.4m. This financial year (FY26), analysts expect £20.4m.
I’m optimistic that at some stage, growth will accelerate, leading to a share price rally. After all, global telecoms networks are going to need massive upgrades to handle all the exciting technologies that are coming our way in the years ahead (self-driving cars, etc).
It’s worth thinking about how bad network reception is in some parts of the UK today. In more remote parts of country, it’s often non-existent!
Note that in its August AGM statement, Calnex pointed to innovation in the industry around 1.6Tb/s and high-speed application testing as potential growth drivers. 1.6Tb/s is the next generation of speed in high-speed networking and it’s essential to handle the demands of AI.
Opportunities in the defence industry
The story here isn’t just about telecoms though. You see, recently, Calnex has been expanding into other industries and markets including cloud computing, defence, space satellites, and the US Federal market.
I think the defence industry could be a source of growth for the company (especially with NATO countries set to spend more on defence). In its AGM statement, Calnex said that Network and Application Assurance (NAA) platform enhancements are unlocking additional opportunities in defence as complex network environments require high-quality test equipment.
I see potential
Now, there’s no guarantee that growth will pick up, of course. A risk is that companies in Calnex’s markets turn to competitors for testing products and services.
I see a lot of potential though and I’m backing the company – which is founder led – to turn things around. At 59p, I reckon this penny share is worth a closer look.
