Is ITM Power (LSE:ITM) a good first stock for new investors?

ITM Power (LON:ITM) is a renewable energy play operating in the green hydrogen sector. Is this stock a good buy for a new investor?

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As a new investor, it can be tough deciding which stocks to buy first. There are so many to choose from. In fact, there are 350 relatively large companies in the FTSE 100 and FTSE 250, plus over 800 on the FTSE AIM.

Altogether, the Main Market of the London Stock Exchange hosts over 1,000 companies from 100 countries. So, where to start is a valid question.

One popular stock in the past year has been ITM Power (LSE:ITM). It’s operating in the green hydrogen space. This is a trending sector with lots of momentum, but is also highly speculative.

The Motley Fool’s long-term-investing mindset means looking for quality companies to stand the test of time. That means companies with a competitive advantage, integrity, and that are preferably well established. A dividend is a nice addition that can help build wealth through the power of compounding.

The ITM share price is volatile

ITM Power manufactures integrated hydrogen energy systems. With global pressure on reducing our carbon footprint mounting, research into alternative green technologies like hydrogen is well under way.

Founded in 2001, ITM Power has been listed on the London Stock Exchange since 2004. During that time, the ITM share price has risen over 700%. However, its share price appeared to coast sideways during the decade between 2009 and 2019.

Then, between September 2019 and January this year, ITM shares rocketed over 1,500%. But they’ve been on a downward slide since then, and are over 40% below their January high.

Analyst price targets range between 310p and 867p. So, it’s currently at the lower end of the scale. Nevertheless, I think the January high was fuelled by an extraordinary level of retail investor mania at the time and is not a good benchmark for true value.

ITM Power’s financial outlook

In its last half-year report to the end of October 2020, the company showed an order backlog worth £124m plus £434m in the pipeline.

A June 10 trading update said this order backlog had increased to £154m with £607m in the pipeline. But total revenue is projected to drop from £5.4m last year to £4m this year. The reduction is due to Covid-19.

ITM Power expects to produce 50MW of electrolysers by 30 April 2022. 33MW are in the backlog, and the rest in the advanced stages of negotiation.

Notable hedge funds BlackRock and Canaccord took a stake in ITM in February. Fidelity Investments Canada and Robeco followed them. I think institutional investor interest shows a level of confidence in the firm.

Is this a good stock for a new investor?

Unfortunately, the company is loss-making, and losses for the full year to April 2020 were more than double those of the previous year. It’s taking its time to scale commercially, which is probably making investors impatient. Plus, there’s no dividend.

ITM Power has geared up its manufacturing and operational capacity, so it should be ready to hit the ground running as it moves into larger-scale projects. While there’s undoubtedly potential here, and it may well thrive, I’m not convinced it’s a good stock for a new investor.

That’s because I’d be wary of jumping into momentum-led sectors without confirming the credibility and longevity of the business. I think starting with FTSE 350 stocks is a safer and less volatile way for new investors to discover the world of stock market investing with plenty of growth potential on offer.

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 assessed. Consider taking independent financial advice.

Kirsteen 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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