When the ASX opened this morning, CellNet Group Ltd [ASX:CLT] shot out of the gates.
For a brief moment, the tiny stock reported a 202% gain. Peaking at 13 cents per share, more than tripling its previous close of 4.2 cents.
Since then, things have cooled off a bit. With CellNet bobbing around the 7-cent mark at time of writing. Which is still a respectable 62.79% gain for the day.
Still, it’s a far cry from the crazy returns early traders cashed in on.
So, why the sudden share price surge?
First and foremost, CellNet is quite a unique company. They offer and sell their services for distribution of mobile accessories, lifestyle devices and video gaming products.
But rather than having businesses come to them, CellNet sources its own products. Picking and choosing products that it markets to retailers, on-sellers and customers.
It’s a rather novel sales channel, but it seems to be working. As was made clear in today’s trading update. The catalyst for the strong share price movement.
As CellNet notes, for the month of October, revenue hit $12.6 million. Up 18% compared to the same time last year. Largely driven by the launch of the Apple iPhone 12 and subsequent demand for a variety of accessories that CellNet provides.
Though the company was also upbeat about its gaming division as well. Noting that it too is ‘performing strongly’, as it delivered a positive earnings result.
It’s because of these strong results that CellNet reported a $1.05 million pre-tax profit. Vastly eclipsing the $300,000 pre-tax profit last October.
That has brought CellNet’s year-to-date pre-tax profit to $1.6 million. Up 410% year-on-year; clearly highlighting the fantastic results the company is seeing at the moment.
As CEO, Dave Clark put it:
‘Our October result is a real testament to the dedication and hard work that the team has put in to make this iPhone launch our most successful yet.
‘Our revenue and profit for October surpassed all expectations, delivering one of the best monthly results Cellnet has ever produced. I am extremely proud of the team for this achievement, and grateful to our loyal vendors and stable of brands.’
And with any luck, this trend may be set to continue. Because as CellNet notes, the upcoming release of Microsoft and Sony’s ‘Next Gen’ gaming consoles could bolster sales even further.
Not to mention anticipation of a bumper Christmas.
For that reason, shareholders had plenty of reasons to celebrate today. But when it comes to the CellNet share price, the ultimate question is whether it will be sustainable…
What’s next for CellNet?
The key reason for the sharp open and subsequent sell-off is pretty clear.
Existing investors have been quick to take any sort of gain they can. After all, it has been a pretty rough year all things considered for CellNet.
So while this October result is positive, it may just be a flash in the pan. Because as CellNet even states, it was the release of the iPhone that drove this record result. And that’s not something that they can count on month in month out.
For that reason, shareholders do need to think about the long-term potential of this stock. After all, it is a company that has very volatile revenues and profits.
Keep in mind, that doesn’t make it a bad stock, just a speculative one.
That’s why, if you’re a little more conservative when it comes to small-cap investing, we suggest looking for companies with more substance. Something that we’ve made of in our ‘high-value small-cap’ report.
For all the details — including some our favourite picks — get your free copy, right here.
For Money Morning