The Motley Fool

Why did the ITM Power share price crash this week?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Arrow descending on a graph portraying stock market crash
Image source: Getty Images.

It’s been a good year for the ITM Power (LSE:ITM) share price. The green hydrogen company has seen its stock rise by more than 60% over the last 12 months. But this week, it crashed by more than 10% in a single day, following its latest earnings report. Was the news as bad as investors think? Or is this an overreaction that has created a buying opportunity for my portfolio? Let’s take a look.

A year of progress

Despite what the direction of the share price would suggest, ITM Power has achieved some impressive milestones. As a reminder, the firm is a specialist designer and manufacturer of electrolyser machines. These are capable of extracting hydrogen from water without emitting any greenhouse gas emissions. Needless to say, it’s a much more environmentally-friendly process than the traditional method of obtaining the element from hydrocarbons.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

In 2021 it successfully completed the initial construction of the first electrolyser Gigafactory worldwide. It sold the world’s largest PEM electrolyser to its strategic partner Linde Engineering. And has refocused its efforts on larger-scale systems. As a result, it has around £36m of contracted backlog orders, along with £171m in the final stages of negotiation. These have increased by 125% and 44%, respectively, compared to a year ago.

For such a young business, that is a pretty impressive accomplishment. At least, that’s what I think. So why did the ITM Power share price crash after releasing the report?

The ITM Power share price has its risks

Why the ITM Power share price tanked

As encouraging as this year’s progress has been, the financial performance isn’t as impressive. Despite the strides taken, revenue for its 2021 fiscal year came in at a mere £5.1m. That’s actually a 6% decline versus last year. However, it is worth noting that revenue in 2020 was inflated by grants that weren’t received in 2021.

The loss from operations stood at £26.7m. While this did improve by 9% from £29.4m, it showed the company is still in the red and will likely remain that way for quite some time. Fortunately, management has built up a substantial cash war chest of £176.1m, granting it enough of a runway to keep operations going for a while.

Overall, these are hardly terrible numbers. But when a business is carrying a £2.6bn valuation, the level of expectations from investors is exceptionally high. It seems many individuals are placing a substantial value on the firm’s contract pipeline. In addition to the £171m of near-signed agreements, there’s a further £378m in the early stages of negotiation. But I think it’s essential to realise that none of these contracts may get a signature.

With that in mind, seeing such volatility in the ITM Power share price is hardly surprising.

The bottom line

This business continues to intrigue me. Current analyst forecasts for 2022 predict that revenues will surge to around £26m. But even if ITM Power manages to meet this target, its inflated share price still places the price-to-sales ratio at a whopping 100. At such a lofty valuation, the slightest hint of trouble is enough to send a stock crashing down. Personally, I’m not interested in adding that level of risk to my portfolio. So, it’s staying on my watchlist for now.

Fortunately, there is another exceptionally cheap high growth stock that caught my attention this week...

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.