Is the rising ITM Power share price a bubble?

The ITM Power share price is rising again after opening a new manufacturing facility. But is this hydrogen stock turning into a bubble?

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The ITM Power (LSE:ITM) share price is on the rise again. Over the past week, the hydrogen company has seen its stock soar by nearly 20%, pushing its 12-month performance to just under 70%. But is this a bubble waiting to burst? Or is now the time to add this business to my portfolio? Let’s take a look.

The rising ITM Power share price

As a reminder, ITM Power is a designer and manufacturer of electrolyser machines capable of extracting green hydrogen from water. Historical methods of obtaining the element are dependent on using hydrocarbons (fossil fuels). And the process is not exactly environmentally friendly. But with an electrolyser, the carbon emissions are zero.

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With governments across Europe advocating for cutting emissions, the company’s technology has started seeing a high level of demand from customers. And while that’s undoubtedly positive news, it’s created a bit of a problem. ITM Power has long since lacked a proper manufacturing facility. Consequently, its order backlog has grown quite substantially. And as of June, the firm had £154m worth of contracts waiting to be fulfilled, with a further £607m of potential agreements waiting to be signed. But this problem may now be solved.

Last week, the firm officially opened its first Gigafactory in Sheffield with an annual manufacturing capacity of one gigawatt of electrolyser equipment. With this facility now operational, I think it’s likely that the order backlog will start to fall. And getting signatures on new contracts should be a bit easier as well. So, I’m not surprised to see the ITM Power share price surge on the news.

The risks that lie ahead

As encouraging as this progress is, the underlying financials are less so. ITM Power’s recent boost to its share price has pushed the market capitalisation to reach £2.5bn. And yet last year, the company generated less than £3.5m in revenue, as well as incurring a record loss of £29.6m.

It seems that investors are placing a large amount of value on the £607m contract pipeline. But it’s important to remember that these deals remain unsigned and might stay that way. What’s more, even with the new Gigafactory, management expects revenues to reach around £35m-£40m by April 2022. That’s certainly a significant improvement on current levels. But to me, it still doesn’t justify a £2.5bn price tag.

The ITM Power share price has its risks as do all hydrogen stocks

The bottom line

With the world shifting towards renewables, the role of green hydrogen is becoming ever more important. And ITM Power seems to be leading the way with its patented technology. However, with such high levels of investor expectations baked in to its share price, the stock looks like a bubble. And the first sign of trouble could cause it to burst.

Personally, I’m not interested in adding that kind of risk to my portfolio. And so, I’ll be keeping this hydrogen stock on my watchlist.

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Zaven Boyrazian 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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