Last month, the UK Government revealed plans for a ‘Green Industrial Revolution’ which greatly benefits a particular hydrogen stock, I feel. The timeline to phase out diesel and petrol vehicles was bumped forward to 2030. This adds additional pressure to vehicle manufacturers in transitioning to ‘clean’ energy sources. This has created several investing opportunities within the space. But are electric vehicles the best option?
Batteries have some limitations
Electric-powered vehicles are becoming more common every day, with charging points popping up around the country. However, there are two distinct drawbacks to the technology.
The first is charging times. These have definitely improved over the years, but even with rapid charging stations, it can still take up to an hour before a vehicle is ready to hit the road.
The second and more environmentally problematic issue is emissions. Electric vehicles don’t release any emissions themselves, however, the process to generate the electricity being used does.
Today, around half of the UK’s electrical power is generated from renewable energy sources. But that may be insufficient to keep up with the rapid increase in demand. Thus, reliance on gas turbines may become necessary, albeit temporarily, until additional renewable sites can be brought on-line .
Can this hydrogen stock solve these problems?
Hydrogen suffers from neither of these issues, but until recently was only sourced from fossil fuels. The extraction process isn’t particularly environmentally-friendly.
But thanks to the new patented technology by ITM Power (LSE:ITM), hydrogen can now be extracted from the most abundant material on this planet – water.
Using a process called electrolysis, water molecules are broken into their base elements, oxygen and hydrogen, with no greenhouse gas emissions.
The hydrogen stock is already collaborating with car manufacturers, including Honda, Hyundai, and Nissan. They’re working to provide a continual supply of hydrogen to new fuel stations currently being built across Europe.
It is also heavily involved with finding new applications of hydrogen within household gas supplies. And it has partnered with Shell to help build the world’s largest electrolyser in Germany.
Why am I waiting for a market crash?
ITM Power’s technology has proven itself to be viable. Combining that fact with the wide range of projects and collaborations it is engaging in makes the stock sound very promising. At least the market seems thinks so since the share price has increased by over 520% over the last 12 months!
But to me, this looks like a classic case of a runaway valuation. Today the company has a market capitalisation of over £2bn. But it remains unprofitable, and only generated £3.3m revenue last financial year.
To put that into perspective, that is a price-to-sales ratio of over 600! Perhaps one day, the hydrogen stock will be able to meet shareholder expectations, but I don’t see that happening for a long time.
Is ITM Power a hydrogen stock worth owning?
As the world transitions towards net-zero, ITM Power looks like a great business with plenty of room for expansion and many opportunities ahead.
However, I think the current valuation is simply too high with respect to the underlying financials. Therefore, I’m keeping an eye on the firm for now. Should the share price decline to a more reasonable level (perhaps if we see another stock market crash) then it may become a fine addition to my portfolio.
