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Penny stocks are volatile, high-risk investments. Due to their low liquidity and often uncertain business models, these small companies can experience a drop in share price. However, when everything goes according to plan, the potential benefits can be amazing.
Indeed, recent investors in the Science in Sports (LSE:SIS) will be rubbing their hands together today. The penny stock has more than doubled in value this year to just over £60m today. It has been a remarkable recovery since the share price hit a 10-year low in April 2023.
So, what are the reasons why a sports team will perform well in the stock market in 2024? And can it continue to run forward?
Let's take a closer look.
Business model
Sports Science is not the new kid on the block. The company was established in 1992 and received approval London Stock Exchange in 2013.
Today, the company has two main divisions: SiS and PhD. The former offers a product line of gels, powders, and bars designed to aid energy, hydration, and recovery. It is the official supplier of more than 320 professional sports teams and organizations around the world.
PhD products include electrolyte powders, protein bars, and supplements. Instead of focusing on professional athletes, this side of the business is aimed at the active lifestyle community at large.
Getting big benefits
It is good to admit that despite this year's good performance, long-term shareholders are still nursing huge losses. For context, the price has fallen by 51% in five years. There is still a long way to go before the stock fully recovers.
Strategic restructuring appears to be the driving force behind this year's meeting. Under the new senior leadership team, the company focused on delivering cost effectively and left behind low revenue streams. In addition, in some export regions, the group has moved to a royalty-based model.
These efforts are beginning to bear fruit. Underlying EBITDA improved to £2m in FY23 – a 174% increase on the previous year. Additionally, gross margins increased to 43%. More progress is expected this year.
Making business easier and more profitable is rarely a bad thing from an investor's point of view, unless it has a significant negative impact on top line growth.
Possible obstacles
In that regard, I have concerns that Science in Sports may hurt its growth trajectory.
The group expects first-half revenue to fall to £25.5m, from £34.4m last year. That 27% reduction should not be ignored. It makes me skeptical about the rate of recent price gains.
Guidance from the board suggests that the drop in revenue will be a temporary problem during the company's transition. Potential investors are advised that managed income growth should return “in the mean time”. We will see.
A penny stock to consider buying?
The company's renewed focus on profit margin growth is encouraging. In all specific metrics, there are already signs of significant improvement.
However, the decline in revenue makes me wonder if the recent stock price rally is sustainable. I would like to see concrete evidence that the company can improve margins while at the same time increasing revenue before investing.
I will examine the following results carefully for clues as to which way to go, but I am holding off on buying this penny stock.
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