As the Powerhouse Energy share price falls, should I buy?

As the Powerhouse Energy share price falls, Christopher Ruane considers whether now is the time to add it to his portfolio.

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Since the start of the year, Powerhouse Energy (LSE: PHE) has lost over 40% of its value. While the Powerhouse Energy share price is still 54% up over the past 12 months, its recent performance has been weak.

With the penny stock losing strength, is now a time to buy it for my portfolio?

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Powerhouse Energy and energy shifts

Powerhouse Energy has a proprietary technology that allows it to extract gas from used plastics. That gas contains hydrogen, which means that it can be used to fuel hydrogen cells.

Based on that, the investment case for the company would seem to tick a lot of boxes. Plastic waste has been a mounting concern – and Powerhouse seems to offer a partial solution for that. Hydrogen is seen by many commentators as a replacement for fossil fuels – and Powerhouse can help with that too.

Not only does the company seem to respond to current trends, it is moving forward commercially too. The first site using Powerhouse’s technology is expected to be operational in Ellesmere Port next year. A second plant is now planned, in West Dunbartonshire.

The company has also had some success licensing its technology abroad. Last month, for example, the company announced heads of terms with a view to licensing the technology in Hungary and Greece. That deal alone could net Powerhouse €250,000.

With positive developments like this, why has the Powerhouse Energy share price been falling?

The falling Powerhouse share price

First, it’s worth noting that Powerhouse isn’t a new company. Its listing dates back over two decades. While it’s a penny stock now, it once hit a valuation more than 1,000 times higher than today. By this point, many investors have long since lost confidence in the stock, no matter how promising the latest business developments may seem. That is understandable, but it isn’t necessarily rational.

Another concern when I look at the Powerhouse Energy share price is the company’s weak financial performance. Take its most recent annual report, covering 2019, as an example. The company – as has been the case for many years – didn’t report any revenue at all. It did sign a contract which ought to generate revenue in the future. But not a single penny came through the door in 2019. Meanwhile, the company lost £1.5m. The year before it also didn’t generate any revenue, and lost £2.3m.

For a company spending money in research and development before launching a product widely that is understandable. But the Powerhouse Energy share price even at its current low level means the company is capitalised at more than £200m. I think to justify such a valuation, a lot of things need to go very well for the company in future. Its track record to date gives me limited basis for confidence that that will happen.

I’m not buying

Even after its recent fall, I won’t buy Powerhouse Energy for my portfolio. As well as valuation concerns, risks include shareholder dilution if the company needs to raise funds, any teething problems at its first site incurring costs, and shifting environmental regulations affecting the attractiveness of its technology.

I think its technology and growing commercial plans mean business prospects are improving. But its valuation seems rich to me for such an unproven business model. 

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Christopher Ruane has no position in any of the 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.

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