The past year has been rewarding for shareholders in Ceres Power (LSE: CWR). Despite falling in 2021, the Ceres Power share price is still more than double what it was a year ago.
Here I explain why the share price has moved so much – and what I’ll do next.
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The Ceres Power share price and momentum
Investors sometimes talk about a share being driven by “fundamentals” and on other occasions by “momentum”. Fundamentals are things like profit announcements and business developments. Momentum refers to share trading or sentiment driving a price up or down, somewhat detached from the company’s underlying business performance.
Often a share is driven by a combination of both fundamentals and momentum. But in the end, I think fundamentals tend to take more prominence. As investment guru Benjamin Graham wrote, “in the short run, the market is a voting machine but in the long run, it is a weighing machine”.
The dramatic run up in the Ceres Power share price late last year, and its fall since, look to me like they were driven by momentum. As investors piled into alternative energy stocks, Ceres was a beneficiary. Once many investors decided to abandon the trade, the Ceres Power share price started to give up some of its prior gains.
Ceres Power fundamentals
The company issued an upbeat trading statement last month which provided grounds for optimism on its business prospects.
Revenue and other operating income for the first half was around £17m, almost double the £8.9m the company reported in the equivalent period last year. It is in line to deliver around £31.5m of revenue this year. The business isn’t just growing in terms of sales. It added over 100 new employees in the first half. That suggests that it is steadily ramping up its business operations.
Profits are more elusive. Last year the company’s post-tax loss was £14.9m. I expect it to continue to be lossmaking this year. This is quite common with technology startups as they invest in scaling up their business commercially. Still, it does take some of the shine off the company for me. Growing losses may be one reason the Ceres Power share price has been falling across 2021.
Bearish points on the Ceres Power share price
While I like the strong revenue growth and signs of an enlarging business, I continue to see reasons to be bearish about the Ceres Power share price.
As losses mount, the company’s liquidity becomes more stretched. It can resolve this, for example by raising more funds in the stock market. But that can dilute existing shareholders. For example, in May the Chinese company Weichai bought £43.5m in new Ceres Power shares. Seen positively, that looks like a vote of confidence in Ceres. But on the downside, such liquidity boosts dilute existing shareholders.
I am also concerned about the company’s path to profitability. While its technology seems to be establishing a good reputation, losses have been growing. With competition increasing in the alternative energy area, the company may need to invest more in product development to stay competitive.
Given its lossmaking status and the fact I don’t currently see a clear path to profitability in the near future, I am not buying Ceres Power shares for my portfolio right now.