Penny stocks are volatile, high-risk investments. Due to their low liquidity and often unproven business models, these small companies can experience dramatic share price falls. However, when all goes to plan, the potential gains can be stunning.

Indeed, recent investors in Science in Sport (LSE:SIS) will be rubbing their hands today. This penny stock has more than doubled in value this year to a market cap just above £60m today. It’s been a remarkable recovery since the share price sank to a 10-year low back in April 2023.

So, what are the reasons behind the sports nutrition group‘s impressive stock market performance in 2024? And can it continue to race ahead?

Let’s take a closer look.

The business model

Science in Sport isn’t a new kid on the block. The company was founded in 1992 and gained admission to the London Stock Exchange in 2013.

Today, the firm has two main divisions: SiS and PhD. The former offers a product range of gels, powders, and bars designed to aid energy, hydration, and recovery. It’s the official supplier to over 320 professional sports teams and organisations worldwide.

PhD’s products span electrolyte powders, protein bars, and supplements. Rather than focussing on professional athletes, this side of the business is targeted at the active lifestyle community more broadly.

Scoring big gains

It’s worth acknowledging that despite this year’s stellar performance, long-term shareholders are still nursing some hefty losses. For context, the share price is down 51% over five years. There’s still a long way to go before the stock makes a full recovery.

A strategic reset seems to be the catalyst behind this year’s rally. Under a new senior leadership team, the firm’s focussed on delivering cost efficiencies and abandoned low margin revenue streams. Furthermore, in certain export regions, the group’s moved to a royalty-based model.

These moves are beginning to bear fruit. Underlying EBITDA improved to £2m for FY23 — a 174% increase on the prior year. In addition, gross margins expanded to a healthy 43%. Further improvements are expected this year.

Making a business more streamlined and profitable is rarely a bad thing from an investor’s perspective, unless it adversely impacts top line growth too much.

Potential hurdles

In that regard, I have some concerns that Science in Sport might be harming its growth trajectory.

The group expects its first half revenues will shrink to £25.5m, from £34.4m last year. That 27% reduction shouldn’t be overlooked lightly. It makes me quite sceptical about the extent of the recent share price gains.

Guidance from the board suggests the revenue slump will be a short-term issue during the company’s transition. Potential investors are advised that controlled revenue growth should return “in the medium term”. We shall see.

A penny stock to consider buying?

The company’s renewed focus on profit margin growth is exciting. Across certain metrics, there are already signs of significant improvement.

However, declining revenues make me question whether the latest share price rally is sustainable. I’d like to see concrete evidence the firm can improve margins while simultaneously boosting revenue before investing.

I’ll pore through the next results carefully for clues about the direction of travel, but I’m holding off from buying this penny stock just yet.