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There’s an old saying that “stocks take the stairs up and the elevator down“. One volatile former penny stock seems to have an elevator that goes in both directions!
Back in 2019, AIM-listed marketing software business Eagle Eye Solutions (LSE:EYE) had a share price in pennies. Its fortunes changed in the pandemic. The stock enjoyed a stunning rally and its value quintupled, supported by impressive financial results. At one point, it reached a high of £6.75.
But this week, disaster struck. On Monday (2 June), the company’s share price plummeted 42%. The ex-penny stock’s now changing hands for around £2, and its market cap has crumbled to £61.2m.
What’s behind the catastrophic fall? Is Eagle Eye Solutions now a cheap stock to buy or a value trap to avoid?
What the company does
Founded in 2003, this software as a service (SaaS) company offers digital marketing services and powers loyalty schemes for businesses. Its client base is concentrated in retail, travel, and hospitality.
Notable examples of Eagle Eye Solutions’ partnerships include Tesco‘s Clubcard Challenges programme and the PizzaExpress omnichannel loyalty scheme. The company’s cloud-based AIR platform executes around 1bn personalised offers for customers each week.
Why the share price crashed
The massive sell-off in Eagle Eye Solutions shares was triggered by the termination of a high-margin contract to provide digital promotion services for a national US grocery retailer. The agreement will expire on 2 August.
This deal was worth around £9m-£10m in annual revenue for the firm. Measured against last year’s total sales of £47.7m, it’s clear that this is a crippling blow.
Having an overreliance on a single client is a big risk for any company, but it can be particularly acute for a small-cap stock. The group has admitted the impact on its FY26 performance “will be material“.
Responding to the disappointing news, Eagle Eye Solutions announced it will implement cost-cutting measures, and the firm was keen to highlight it remains optimistic about future growth opportunities. Clearly, the market takes a gloomier view.
What the future might hold
Arguably, the board’s optimism about the trading outlook has some credibility. The balance sheet looks healthy with a net cash position of £12.5m and access to £20m of undrawn facilities. This equips the company with financial firepower to respond to the contract loss.
Meanwhile, growth opportunities from artificial intelligence (AI) are another positive. AI tools provide scope for tailored personalisation at a mass scale, and Eagle Eye Solutions has been bolstering its capabilities in this area. In addition, the recent appointment of AI and big data specialist Zyed Jamoussi as Chief Technology Officer could prove to be a shrewd move.
However, I’m concerned about the ending of the key US partnership and the impact it could have on future capital investments. It might not be sufficiently devastating to send the shares back into penny stock territory. That would require more than a further 50% fall from here. But it’s a huge storm cloud on the horizon.
There’s a chance investors may be handsomely rewarded if Eagle Eye Solutions can take the contract loss in its stride. Unfortunately though, the risks look too big for me right now to join their ranks.
