But that doesn’t seem to be the case for Kooth (LSE:KOO). Following a double-digit surge in January, it’s now trading at a share price of around 119p – just slightly outside penny share territory.

The digital mental health platform has drawn the attention of the experts at Canaccord Genuity. And after evaluating the business, the team of analysts has placed its 12-month share price target at 330p. That’s a 203% projected potential gain – enough to turn £1,000 into over £3,000!

What’s made these experts so bullish? And should growth investors now rush to buy?

A 200% potential gain?

The surge in January was driven by a combination of factors. But what particularly stood out is the impressive progress being made in California. After signing a deal with the State Department of Health Care Services (DHCS), Kooth has outperformed its registration targets, with one in 40 young Californians signing up since its launch in January 2024.

While Kooth’s US expansion is still in its early days, a successful scale-up of platform adoption across America presents a transformational opportunity for the business, unlocking a potential future surge in revenue. This is what has the team at Canaccord excited.

The California contract alone is estimated to add 145p of value per share for investors. And then combined with the cash on the balance sheet and value generated by the firm’s already-established UK operations, Canaccord’s sum-of-the-parts valuation model estimated the firm’s intrinsic value to be around 330p.

But when digging a little deeper, I spotted something troubling…

Enormous margin of error

For Kooth shares to realise the hidden potential that Canaccord believes it’s identified, the firm’s expansion into California needs to be a success. So far, the registration numbers suggest that its mental health platform is resonating well. But that may ultimately not matter.

In October 2024, the State of Pennsylvania cancelled its contract with Kooth after an investigation revealed child safety concerns.

While politics may have had a role to play, the decision sets a precedent that might deter other states from engaging with the company for future contracts, as well as creating expansion headwinds in states where Kooth is already operating.

Even if that doesn’t happen, the timeline of a full-scale ramp-up in the critical Californian market remains unknown. And subsequently, even the bullish projection from Canaccord reveals shrinking revenues in 2026 and 2027.

So where does that leave investors?

What’s the verdict?

Success in California is the critical catalyst needed for this near-penny share to unleash its growth potential. But as previously mentioned, it isn’t clear if and when this will happen.

In the meantime, the company is struggling to stay consistently profitable, rapidly burning through cash reserves, which shrank by 30% in the first six months of 2025 to £15m.

With that in mind, even though Canaccord’s investment thesis has merits, the outcome for Kooth appears to be binary. Either the share price will surge, or it will steadily collapse as cash runs out. And that’s not a risk I’m willing to take.

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Let’s take a closer look at this under-the-radar small-cap stock.

Digital mental health platform

Kooth is a leading provider of digital mental health services for young people. Its platform offers support, therapy, and wellbeing tools to schools, health systems, and public bodies.

According to NHS England data, it’s now the largest single access provider for mental health support for under 18s. Kooth also has a growing presence in the US, where it has a contract to provide online mental health services for all residents aged 13 to 25 in California.

The reason I refer to Kooth as an ‘almost’ penny stock is because it has a small £50m market cap, but doesn’t trade for pennies. Each share costs 140p (£1.40).

Things I like

At first glance, there are a number of things I like here. For starters, Kooth operates a digital platform with recurring revenue. These can be much more profitable if and when a certain scale is achieved.

Second, the firm is operating in a growing market. Young people these days are sadly suffering more mental health issues due to various factors, including social media addiction and insecure employment prospects. Consequently, demand for Kooth’s services should rise over time.

The fact that the company was able to secure a contract with California highlights the trust placed in its platform (called Soluna). It has reached over 130,000 young people, in all 58 counties, in just 18 months since launch. And it remains on track to exceed the California Department of Health and Care Services’ targets for 2025.

Looking ahead, it’s possible other states could adopt the platform, driving significant long-term growth. It’s already working with New Jersey, and is expanding the services it offers. It’s on track to launch Soluna in the UK in 2026.

Finally, the balance sheet is strong, with £15.3m net cash and an undrawn $9.5m facility.

Huge potential, say brokers

As for negatives, I see a couple of things here. One is that the company has been investing heavily in direct marketing in California to raise user awareness. In the first half, this resulted in gross margin compression and a huge fall in adjusted EBITDA (down to £1.6m from £7.8m). The post-tax loss was £1.3m.

With these investments made, things are expected to improve in the second half. But this shows that the company’s profitability is still quite precarious at this stage. And there’s currently not much revenue growth forecast for the next couple of years.

Another risk is the key California contract. If this isn’t renewed in 2027, it would be a major blow.

All things considered, the low level of top-line growth doesn’t appeal to me, so I won’t be investing. But it’s worth noting that Canaccord Genuity and Berenberg Bank both maintained Buy ratings on the stock this week.

And while they lowered their price targets, these are still each significantly above the current share price. Indeed, Berenberg’s target of 430p is 207% higher!

On this basis, the small-cap stock might be worth further research.

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Looking ahead, investor sentiment could get a boost as inflation and interest rates fall. So I think now is an opportune time to consider snapping up UK small-cap stocks.

Analysts are bullish on this one

One that’s recently caught my eye is Kooth (LSE: KOO). This is a digital mental health provider with a market cap of just £114m.

Since going public in 2020, the stock has risen 36%. However, its down 19% from a high reached three years ago.

On 17 September, Canaccord Genuity reaffirmed its ‘buy’ rating on the stock and issued a 580p share price target. On the same day, Berenberg Bank also reissued its ‘buy’ rating, with a 590p target.

If these are realised, they’d represent gains of up to 81% from the current 326p price. Naturally, this isn’t guaranteed to happen. But when there’s such a big discrepancy, my ears prick up.

What does the firm do exactly?

Kooth works with the NHS, local authorities, charities, and businesses to provide digital mental health services to children and young people. It’s one of the largest and most trusted providers in the UK.

Last year though, Kooth won a contract with the California Department of Health Care Services worth at least $188m. It will offer digital mental health care to 13- to 25-year-olds across all 58 counties in the state until mid-2027.

In the first half, the firm’s revenue surged 179% year on year to £32.5m. This was driven by the expansion in the US, which now accounts for approximately 70% of total annual recurring revenue.

The gross margin expanded to 82.4%, up from 68.8%, while adjusted EBITDA was £7.8m. Post-tax profit came in at £3.9m, up from £0.5m.

While Kooth is growing nicely, it doesn’t have a long track record of profitability. This increases the risk to the investment case.

Mental health epidemic

Stepping back, this (sadly) seems like a large and growing market. Social media is leading to rising levels of anxiety and depression among young people.

According to the British Medical Association, the rate of people aged 17-19 likely experiencing a mental health disorder rose by approximately 150% between 2017 and 2022.

Shockingly, Kooth says that 22% of high school students in the US have seriously considered suicide in the past year.

These issues aren’t likely to go away in the digital age, which should result in rising demand for the company’s online mental health platform.

My decision

There are a number of things I like here from an investment perspective:

• Growing revenue, most of it recurring
• Strong purpose at its core (robust ESG)
• Strong balance sheet, with net cash of £14.9m
• Likely expansion into other US states (it’s also won a contract in Pennsylvania)
• Entering the $30bn Medicaid market

The firm is only just turning profitable, so the P/E ratio is of little use. But the stock is trading at about 1.7 times forecast sales. That’s very cheap for a growing business, in my opinion.

I’ll consider buying Kooth shares with spare cash in October.

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