Penny stocks are shares that trade for less than $5, allowing investors to buy large quantities at minimal cost. They often represent growing companies from disruptive industries, and they have the potential to generate significant returns.

Surf Air Mobility (SRFM), an electric aviation and air travel company, is one such penny stock with significant upside potential, according to Wall Street. Its disruptive niche is in electrifying the aviation sector, where it offers a membership-based flying model. 

Valued at $67.6 million, SRFM stock is down 71% year-to-date, lagging the S&P 500 Index’s ($SPX) gain of 27.6%. But for investors willing to take on the risk, it could be a worthwhile bet. The Street-high price target implies upside potential of more than 500%. 

About Surf Air Mobility

Founded in 2012, Surf Air Mobility is positioning itself as a disruptor in the aviation industry. The company provides a subscription-based service for private and semi-private flights, primarily aimed at regional travelers. It stands out for its commitment to electrifying regional air travel. It intends to transform the industry through electrification and an AI-powered software operating system.

In the most recent third quarter, total revenue of $28.4 million exceeded the company’s targets. However, it fell slightly from the year-ago quarter's total revenue of $28.9 million. Recently, the company secured a four-year term loan of $50 million from Comvest Partners. This loan addresses the company's short-term liquidity needs while preventing any potential share dilution.

Management believes that this financing will help to fuel the company's four-phase transformation plan and improve profitability in the near future. Being a growth stock in its early stages of development, Surf Air is still not profitable. Its net loss in the third quarter stood at $12.2 million, owing to high R&D expenses for electrification and software technology, as well as other costs.

Looking ahead, management anticipates revenue of $25 million to $28 million in the fourth quarter, up from $26.8 million in the year-ago quarter. Adjusted EBITDA loss could be between $5 million and $8 million, which is an improvement over the $18.4 million loss in Q4 2023.

The company did not provide full-year guidance. However, analysts covering the stock anticipate a 98.5% increase in revenue to $120 million in 2024, followed by another 47.5% increase in 2025.

Is This Penny Stock a Buy?

Canaccord Genuity analyst George Gianarikas maintained his “Hold” rating for the stock. Gianarikas believes that, despite the good Q3 performance, the company is still not profitable. It has improved its liquidity position with the loan. However, achieving profitability is contingent on the company's “ability to identify and capitalize on high-demand, high-margin routes, as well as successfully executing its aircraft electrification program.”

Likewise, Piper Sandler analyst Alexander Potter has maintained his "Buy" rating for the stock.

Overall, Wall Street believes SRFM stock is a “Moderate Buy.” Out of the three analysts covering the stock, one has a “Strong Buy” recommendation, and two rate it a “Hold.”

The average analyst target price of $8.66 for SRFM implies a 175% increase over current levels. Furthermore, analysts have set a high price target of $20.99, implying that the stock could rise as much as 566% over the next year.

The Bottom Line on SRFM Stock

SRFM is a penny stock. While it provides the allure of high returns, it also carries significant risks. 

The aviation market is competitive. Convincing consumers to switch from traditional airlines to subscription-based models may take some time, especially in a price-sensitive market. Furthermore, Surf Air Mobility, like many growing businesses, operates at a loss while investing heavily in innovation and expansion. 

Those who have already invested in the stock can hold on to their shares while closely monitoring its cash flows and funding sources. Others interested in this penny stock and its potential upside may want to avoid it until the company turns a profit.