ITM Power’s share price has pulled back. Should I buy the stock now?

ITM Power’s share price is down about 35% from its highs. Edward Sheldon looks at whether he should buy the shares for his portfolio now.

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Shares in clean-energy company ITM Power (LSE: ITM) have pulled back recently. Since late January, its share price has fallen about 35%. However, the stock is still up about 330% over the last year.

Has the ITM share price weakness created a buying opportunity for me? Let’s take a look at the investment case.

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ITM Power shares: the bull case

In today’s world, in which sustainability is very much in focus, ITM Power appears to have a lot of growth potential. It specialises in hydrogen energy solutions designed to take excess energy from the power network, convert it into hydrogen, and then use this clean energy in various applications.

ITM Power says its clean energy will be used in three main areas – Mobility, Power-to-X, and Industry. It adds that there are multiple application areas within each area, all of which are acknowledged to be growing rapidly and requiring systems of ever-larger capacities.

The company readily provides a more detailed look at some of its key markets and given the wide range of applications, ITM could play a key role in the UK’s shift towards net zero carbon emissions.

It’s worth noting analysts expect the firm’s revenues to surge in the years ahead. For the financial year ending 30 April, revenue is expected to rise nearly 90% to £6.16m. Meanwhile, for the year ending 30 April 2022, revenue is expected to increase nearly 400% to £30.1m. This is very encouraging. That’s an impressive level of growth.

My concerns

However, I do have some reservations about investing in ITM Power shares. My first concern is in relation to the stock’s valuation. Even after the recent share price pullback, ITM sports a huge market capitalisation. Currently, it’s around £2.4bn. That equates to a forward-looking price-to-sales ratio of around 80, using next year’s revenue forecast.

That valuation seems very high to me. And high valuations add risk. We’ve seen recently that stocks with high valuations and no earnings can be crushed in a sell-off.

My second concern is ITM Power is still losing a lot of money. In the company’s half-year results for the period ended 31 October, it reported a loss from operations of £12m, up from a loss of £9.8m in the same period a year earlier.

Analysts expect the company to generate net losses of £19.5m this financial year and £10.1m next financial year. I generally avoid unprofitable companies these days because I’ve found they often turn out to be poor long-term investments.

ITM Power shares: my view

Weighing everything up, I’m going to keep ITM Power shares on my watchlist for now. The company certainly looks interesting. However, the valuation looks excessive, to my mind. And the fact that the company isn’t making any money adds considerable risk to the investment case.

All things considered, I think there are plenty of other growth stocks that are a better fit for my portfolio right now.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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