The Powerhouse Energy (LSE:PHE) share price exploded in 2020, increasing by over 1,000%. But since the start of 2021, the share price has started seeing some pull-back, dropping from 9p in January to 6.3p today.
What’s going on? And is this a buying opportunity for my portfolio? Let’s take a look.
A growing alternative energy business
I’ve previously discussed Powerhouse Energy. But as a reminder, the business is an energy producer that developed a proprietary technology to convert waste plastics into a usable synthetic gas called EcoSynthesis. This has the same desirable traits as natural gas and can be used in gas turbines that power the vast majority of UK homes.
But it also contains a large quantity of hydrogen that can be extracted to make fuel cells at a relatively low cost. Given that hydrogen-powered technology is a key aspect of the UK government’s plan to become carbon-neutral by 2050, there could be massive room for growth of PHE’s share price over the long term. So why has it been falling?
What’s happening to the PHE share price?
The market, in general, has seen a pull-back over the past few weeks after concerns surrounding rising inflation and interest rates. Growth stocks like Powerhouse Energy have particularly experienced large drops in share prices due to their already substantial valuations.
Beyond macroeconomic factors, the fall in the PHE share price can also be attributed to a dilution effect. Over the past three months, approximately 15m new shares have been issued to raise additional capital. Why? Because while the company has the technology to turn plastic into power, it has yet to acquire the facilities to do so.
Powerhouse began construction of its first energy plant last year. Once complete, it will have the capacity to power more than 250,000 UK homes. However, a project of this scale will likely take several years to become fully operational. And the management team has not given any indication of when that might happen.
In other words, the business will not be generating any significant amount of revenue for the next few years. And therefore, will have to continue raising capital through additional equity issues or debt to cover expenses. This means more dilution to the PHE share price is likely to occur in the future. At least, that’s what I think.
The bottom line
The global waste-to-energy market is expected to reach $55bn by 2027. That’s almost 80% larger than it is today. Needless to say, that offers substantial room for Powerhouse Energy to grow.
The firm needs to successfully complete the construction of its energy plant, meet performance expectations, and not run into any major problems along the way. If it can do that, then I believe the PHE share price can climb even higher in the future. But that is quite a big ‘if.
Currently, there are simply too many unknowns about the business and the effectiveness of its technology. Therefore I’m still not adding the stock to my portfolio, even at the currently reduced share price.
