The ITM Power (LSE:ITM) stock price is over 250p below its January 2021 highs. The slump can be probably be blamed on the Covid-19 disruption. Lockdowns slashed ITM Power’s revenues, which, when reported, caused investors to run away from shares in the hydrogen electrolyser manufacturer. Now the economy is opening up, is it time to start getting excited about the ITM Power share price prospects?
The case for hydrogen as a fuel
ITM Power makes equipment that can produce hydrogen from the electrolysis of water. It manufactures at a new 134,000 square foot gigafactory in Sheffield, UK. Green hydrogen — that is made by electrolysis of water using renewably generated electricity — is getting political backing from the EU. The UK government is backing low carbon hydrogen, which will benefit the likes of ITM Power, but also includes blue hydrogen. Blue hydrogen is produced from natural gas and requires carbon capture to be net-zero or electrolyser-derived hydrogen with a fossil-fuel-powered electricity supply.
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Governmental support is crucial for a small, immature industry like hydrogen. Hydrogen is backed because it should have a place in otherwise hard to decarbonise parts of the economy. Long-distance road haulage, steel making, and shipping are examples of industries where it’s either hard to tap into a renewable electrical grid or batteries are not a viable option.
ITM Power is making hydrogen pay
ITM Power has partnerships and projects to supply megawatts of electrolyser capacity to Italian energy infrastructure energy company Snam, Royal Dutch Shell, and wind turbine producer Orsted. It already has its electrolysers on-site at hydrogen filling forecourts across the UK. The company grew its revenues from £1.93m in 2016 to £4.59m in 2019, before they slipped during the Covid-19 pandemic, and losses widened. Note, I said losses widened. ITM Power has not yet turned a profit. Even before the pandemic, net profit was negative and getting more so.
But, there is a significant backlog of orders to work through and increasing demand. I expect that backlog to be cleared as its new gigafactory started operations in January 2021. It has to be expected that as turnover increases, profits will follow, but this remains to be seen.
ITM Power Share Price
After a few false dawns, the hydrogen sector does seem to be coming of age now. There are now funds specialising in the sector like the recently launched HydrogenOne Capital Growth fund, although that fund fell short of its £250m IPO target. There is governmental level support for the industry, and its products and services are seeing increasing demand.
Although ITM Power and its share price stand to benefit from the appetite for hydrogen, the stock is still speculative as it is yet to demonstrate it can turn a profit. Also, its shares are very pricy. ITM Power’s market cap is over £2bn, which is around 400 times what it earned in revenue in its best year. I think the company has great potential, but there are unrealistic expectations baked into its share price. These expectations limit the upside. Therefore I would not buy ITM Power shares in my Stocks and Shares ISA right now. But this is a share I will definitely keep on my watchlist.