The UK stock markets have been volatile. More volatility might be on the cards as the economy shrank 0.2% in the last quarter, and a recession looms — however, times like these present opportunities. There might be some hidden gems lurking in the less frequented parts of the stock market that are available at relatively low prices. I have found a penny stock that fits the bill.
Saietta products power electric vehicles
Saietta (LSE:SED) went public in August 2021. In November of the same year, its share price hit a high of 300p but has fallen back to 73p, which is a significant discount. This penny stock might be a diamond in the rough because it designs, engineers, and manufactures complete powertrains for electric vehicles.
Electric vehicles are undoubtedly a growth market. The UK will ban sales of internal combustion engine vehicles entirely from 2040. Other countries have similar plans. Eventually, nearly all vehicles will have electric motors and powertrains, which is what Saietta produces.
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Axial flux technology motor
The company’s edge comes from a potentially disruptive solution for electric propulsion. Its axial flux technology motors, like the AFT 140, are said to be both cheap and highly efficient compared to rival offerings. Its initial aim was to get these into electric bikes, mainly in Asia. It has set up a joint venture in India to spearhead this effort. An acquisition in November 2021 brought it into the market for electric motors for heavy commercial vehicles. It has also launched a range of electric boat motors.
In the last fiscal year, which ended on 31 March 2022, Saietta manufactured 168 motors. That’s some way off the target of 100,000 per year by 2024. But, a new manufacturing facility in Sunderland, UK, is operational. This site produced 24m electric motor units under its former tenant. It will need reconfiguring, but its addition to the Saietta estate has made management confident of hitting its target ahead of schedule and under budget.
A penny stock for the long term
At the moment, Saietta is an early-stage company that sells relatively few motors, and 60% of its revenues come from just three customers. There can be no guarantees that it will find substantial, sustained traction as an original equipment manufacturer for vehicle makers. However, revenue growth of +300% in the last year with 86% growth forecast for the coming years looks inviting. Although the company is making losses, these should eventually swing into profits if the growth story holds.
Part of its share price decline over the last year is due to the market dragging it down. But some of it has to do with company-specific issues. It has raised quite a bit of equity this year. That’s not surprising, given Saietta’s stage in the corporate lifecycle. But, regardless, the share count has increased by 21% this year. Shareholder dilution waters down future returns. More equity raises are inevitable, as the company has enough cash for about a year and is still expanding.
However, despite it being a highly speculative stock, I am happy to buy Saietta for my Stocks and Shares ISA for 2023 and beyond. There might be more share price volatility, and I only expect to be rewarded in the long run.
