Shares in Ceres Power (LSE: CWR) have almost doubled in the past year, growing 97%. But the Ceres Power share price has been sliding from its February peak, losing 30% since then.
Could the fourth quarter of the year provide a boost? Below I explain why I am sceptical it will.
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Strong revenue growth
Today the company released its interim results for the first half. These could be read as glass half full or half empty, depending on what one is looking for.
Positively, on the sales front, revenue and other income grew 96% to £17.4m. The order book ended the first half at £42m. Liquidity was strong, with the company sitting on £263m of cash and investments at the end of the period.
But, negatively, the operating loss remained – and indeed grew bigger. For the six months, it came in at £7.6m, up from £7.2m in the equivalent period last year. The fact that revenue grew far faster than the operating loss is positive. Then again, larger revenue would ideally allow for a reduced not enlarged operating loss, as it makes it easier to spread fixed costs.
Promising business prospects
The interim results again trumpeted the improving prospects for the Ceres business. I do find these increasingly attractive. It is in line to achieve consensus revenue estimates, rollout of its technology continues apace, and the order book is strong. I think the involvement of large strategic shareholders such as Bosch and Weichai is continued evidence that Ceres is being taken seriously on the global stage and highly sophisticated customers see real merit in its technology.
The Ceres Power share price and earnings
Given that performance, why has the Ceres Power share price been falling? I think it’s partly because investor expectations were already set high. Even at the current Ceres Power share price, the company has a market cap north of £2bn. That’s around 67 times its projected revenue this year, meaning the company trades on a price-to-sales ratio of 67.
There isn’t even a price-to-earnings ratio to discuss, because the company has no earnings. Not only was it loss-making in the first half, it has been loss-making year after year. Nor are the losses negligible: more than £7m in six months is a sizeable amount for a company the size of Ceres. Liquidity isn’t an issue, as the company raised £179m in an equity issue this year. But that had the effect of diluting existing shareholders. If losses continue, there is a risk that could happen again.
Q4 outlook for the Ceres Power share price
As Ceres Power remains in a development phase, losses aren’t unusual – although I would prefer to see them reduce, or disappear altogether. They damage the Ceres Power investment case for me.
The strong first half suggests that the remainder of the year could see continued fast revenue growth. I see no prospect of any earnings any time soon, though. The current Ceres Power share price already factors in high expectations in my view, which explains why its excellent revenue growth reported today actually sent the shares a little lower once the market had time to digest the news. So, in the absence of unexpected contract wins, I see no reason to expect the Ceres Power share price to recover to former levels in Q4.