1 cheap ex-penny stock set for huge potential growth and dividends!

The world of penny stocks is full of volatility and danger. This is because small companies often do not have the resources, talent, or experience to succeed in their ambitious journey. However, every now and then, a diamond in the rough emerges.

Phoenix Mobile (LSE:FNX) is a rather unique mobile payments company that has recently left penny stock territory. And despite recent stock price pullbacks, the underlying business appears to be thriving. Let’s take a closer look at what could be a rare combination of high-quality growth and income for long-term investors.

Tapping into the tailwinds of digital payments

Mobile payment technology is a relatively new innovation. But there are already many titans of heavy industry dominating the space. So how can Fonix Mobile, a company with a market capitalization of £200m, stand up and gain market share for itself?

Instead of charging the transaction directly to a debit or credit card, people using the Fonix mobile payment network will see the charge added to their mobile phone bill.

It effectively turns any mobile device into a cash register that provides a lot of convenience. So much so that there are already 18 million people using it. And this adoption continues to rise.

Total revenue for the last six months came in at 14.7% more than a year ago at £32.8m. This comes paired with a 12.3% increase in net income. And since management’s dividend policy is to pay out 75% of adjusted EPS to shareholders, the dividend only rises higher, bringing the yield to 3.4%.

Needless to say, this level of revenue and profit growth from a penny stock (even the former) isn’t exactly typical. Furthermore, with new businesses receiving Fonix payment solutions, and old customers – like ITV – extending their contract, really looks primed to continue thriving. And with the size of the UK mobile payments market expected to grow at a compounded rate of 30.1% to $867.25bn by 2027, there is still huge long-term growth potential.

Even ex-penny stocks are not risk free

While accelerating growth and a generous dividend policy are certainly attractive, it does not mean they are guaranteed to continue in the future.

Fonix Mobile is a cash-generating machine. But only when the transaction flows through the payment network. And with the latest UK inflation data revealing rising food and energy prices, discretionary consumer spending faces headwinds.

But a more serious threat is the stock’s dependence on a few key customers. While the management is slowly expanding the group of traders, the earnings remain very dependent on only 10. And if someone decides to jump ship, it can endanger the cash flow of the company.

Obviously, this is a weakness that should be carefully considered. And it can take a long time for this small company to diversify the merchant pool enough to eliminate this threat.

However, the company generates rapid revenue, profit, and dividend growth while trading at a relatively low P/E ratio of only 23. Therefore, I feel that it is a risk worth taking with a small position in my growth portfolio. And that’s why I’m tempted to grab some shares if I have more capital.