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Why is the Ceres Power share price falling?

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Shares in Ceres Power (LSE: CWR) have added 59% over the past year, but the movement lately has been in the opposite direction. So far in 2021, the Ceres Power share price has fallen 30%.

Here I look at why the Ceres Power share price is falling – and where it might go next.

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How investors value potential

To start, it’s worth thinking about how investors value shares. Many basically use a form of discounted future cash flows. That means that they consider how much money a company might make in future. They then discount that based on how far in the future it will come, as there is an opportunity cost to tying up capital for a long time.

Clearly that’s an imprecise science. It can be easier for an established company in a stable market. Consider Shell or BP for example. Although the future oil price is unknown, analysts can place a value on the companies’ current energy reserves. They then use that to calculate different share price targets based on a variety of energy prices.

That’s hard to do for a young company in an industry still in its infancy. Future demand for fuel cell technology is hard to predict. Pricing is even less clear – often in new industries, a glut of startups can drive down pricing, but sometimes the opposite happens.

Ceres Power has been around for two decades. That means we can glean a lot of useful information from previous accounts. But Ceres Power also remains in a growth stage. That makes it harder to establish what an appropriate value might be for Ceres Power.

Valuing Ceres Power using conventional metrics

The accounts are helpful in evaluating the Ceres Power share price. The company recorded revenue and other operating income of £21.9m last year. The operating loss was £14.8m.

While the loss is sizeable and has grown in the past couple of years, that is common as companies scale up their initial technology. Meanwhile, the growing revenue makes me think that commercial customers find Ceres’ offering compelling enough to spend money on it. That seems like a validation of Ceres’ technology.

With no earnings, there is no price-to-earnings ratio for the company. A price-to-sales ratio shows that the current market capitalisation is around 81 times last year’s sales. That seems steep to me.

Where next for the Ceres Power share price

But Ceres is developing quite fast and its commercialisation seems to be promising. So while losses may be mounting for now, what if sales boom and the extra revenue means the company can turn a loss into profit?

That is clearly the hope of many investors in Ceres. The recent price fall could suggest weakening confidence in the thesis. Further development could need more funds, for example, which risks share dilution. After all, it did tap the market for an additional £180m in March.

If confidence falls further, the share price could continue sliding. But the company is clearly making commercial headway and further good news on that front could lead to the Ceres Power share price moving up again.

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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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