CORRECTION: An earlier version of this article incorrectly alluded to ITM Power producing batteries.
ITM Power (LSE: ITM) has lost over 30% of its value this year. While the ITM Power share price is still 30% higher than it was a year ago, clearly the stock has lost momentum.
Here’s my take on why – and whether I’d buy ITM Power for my portfolio at the moment.
Slow progress
One of the things I think has negatively impacted the ITM Power share price is its relatively slow rate of progress in scaling up commercial operations.
Take this month’s trading update as an example. On one hand, it seemed full of exciting news. From a new gigawatt factory opened this year to a 62% increase in work in progress compared to a year before, it’s easy to understand why some investors see strong growth potential.
On the other hand, revenue for the past year is expected to come in at £4m. That fairly small turnover is much lower than the work in progress number, partly because such work is spread over years. It’s also a sharp fall from the prior year, when revenue was £5.4m. The company was negatively affected by the pandemic, but the revenue fall is still a disappointment.
No sign of profitability
ITM Power expects to announce a loss for the year, even before factoring in costs such as interest and amortisation. That doesn’t surprise me as the company has been consistently loss-making. In the prior year, the company’s loss more than tripled to £29.4m. While we don’t yet know the scale of the loss for the most recent 12 months, I expect it to be substantial. The gigawatt factory alone likely involved considerable expenditure.
With liquidity of £176m at year-end, the company can sustain losses for some time. It’s also common for early stage technology companies to lose money. The new factory should help provide production capacity if ITM Power is able to ramp up sales.
Valuation concerns
With a technology platform, growing operations and substantial liquidity, there seems to be some value in ITM Power. So why have its shares been moving downwards?
I think the issue is not about whether the company has value – but how much it has. Even after the ITM Power share price fall, its market cap still exceeds £2bn. That is a heady amount for a company whose annual revenues are just a few million pounds.
My next move on the ITM Power share price
I think the company has been making progress. From a growing backlog of work to a sizeable pipeline, there are signs of commercial success. The new factory should make it easier to keep growing.
But I think a lot of hope is riding on a small amount of proven success. The company has a valuation that makes me see it more as speculation than investment. Risks abound here. The company could further dilute shareholders to boost liquidity, as it did last year. A new factory often takes time to function properly, so production quality may take a while to get right. The industry is crowded and competitors could squeeze the industry’s profit margins.
With so many variables, ITM Power is not a share I would buy now for my portfolio.
